Written evidence submitted by the Renewable Energy Association

1. The Renewable Energy Association (REA) is pleased to submit this response to the above consultation.  The REA represents a wide variety of organisations, including generators, project developers, fuel and power suppliers, investors, equipment producers and service providers.  Members range in size from major multinationals to sole traders.  There are over 750 corporate members of the REA, making it the largest renewable energy trade association in the UK and the only one to cover all sectors of the energy economy. As such, the REA is well placed to comment on this consultation in regards to HM Treasury’s role in ensuring the UK has a sustainable energy policy.

• Does HM Treasury play a constructive role in developing and implementing Government policies to protect the environment and respond to climate change? What might it do differently?

2. Treasury has an important role to play in ensuring that sustainable environmental policies across government are appropriately financed, setting clear and transparent fiscal boundaries against which governmental departments can design policies for a sustainable future. 

3. Transparent budgetary commitments by HM Treasury create the fiscal basis for the sustainable policies implemented by other departments. They are also one of the strongest signals of intent the government is able provide to the market, demonstrating a cross governmental commitment to protecting the environment and responding to climate change. Furthermore, the Treasury’s ability to control economic instruments like tax breaks, carbon pricing and subsidies means they have administrative control over many of the leavers which can create a favourable investment environment to attract private sector investment and grow sustainable industries in line with the UN Sustainable Development Goals. 

4. However, it is important that there is maintained a clear demarcation between the role of Treasury, in providing the fiscal boundaries for sustainable policies, and the setting of those policies by the appropriate government departments. DECC, DEFRA and the DfT, with their appointed Secretary of States, are clearly designated to take the lead on the decarbonisation of their respective sectors of the energy economy. Aside from fiscal constraints, it should not be dictated by Treasury how the sustainable policies are developed in different departments. Recently within the renewable energy sector we have seen several examples where Treasury has arguably gone beyond this role, such as through the sudden cancellation of Levy Exemption Certificates and the removal of energy generation technologies from Venture Capital Schemes. Both announcements were made without industry consultation, appropriate impact assessments, or regard to the other policy changes currently being implemented on the same industries by DECC. As such, these decisions were particularly damaging to investor confidence, undermining the sense of policy stability. To illustrate this point we note that the commons Energy and Climate Change Committee, during their inquiry on investor confidence, has now heard from several investors who have highlighted how the intervention by Treasury on LECs in particular has unexpectedly damaged cash flow and has raised investor concerns about the stability of other clean energy policies.[1]

5. Overall, the role of HM Treasury in sustainability should focus on providing transparency around the available budgets for fighting climate change, while also ensuring that departmental policies deliver value for money. In terms of actually setting policy, Treasury should work with, and be led by, the appropriate government departments in each sector. Such departments are best placed to identify how sustainable policies should be implemented and what economic mechanism might help, or hinder, the development of sustainable industries.

• What steps should HM Treasury take to incorporate meeting the UN Sustainable Development Goals, as they apply to the UK, into future budgetary cycles and spending reviews and mainstream them across Government?

6. As the Renewable Energy Association we are predominantly concerned with government’s progress towards the seventh UN Sustainable Development Goal, providing affordable and clean energy. We also note that the development of a sustainable energy system will significantly contribute to other development goals including the promotion of good health, creating sustainable communities and helping with sustainable land use. For this reason HM Treasury should now update their analysis of the economic cost of climate change, reassessing the findings of the 2006 Stern Review, and using these findings as a basis for setting out how they will meet the UN Sustainable Development Goals.

7. A review of the Stern Review would highlight the importance of having an operational carbon price, to ensure that unsustainable practices are paying for the pollution they cause. HM Treasury has an essential role to play in setting out a uniform cost in order to provide a clear signal to all government departments and across energy sectors. Currently departments tend to have their own structure for talking about the cost and value of carbon mitigation; as such Treasury should ensure that decarbonisation has a base value per tonne carbon saved.  Departments may then use this base carbon price in order to differentiate the need for action in each sector, taking the base carbon price at face value where a technology is well established and adjusting it upwards, with agreement from Treasury, where a technology needs further support. Furthermore, we also support the Committee on Climate Changes recommendation that Treasury should use carbon accounting regulation to fix the net carbon account for the traded sector of the EU ETS. The current rules mean that the cost of carbon within the non-traded sector is not appropriately calculated and is missing from sustainable policy cost-benefit analyses[2].  As such, we would urge Treasury to state their intentions for the Carbon Price Floor, providing a clear trajectory and commitment to its increase.

8. Similarly, there is an opportunity for the Treasury to play a key role in creating a uniform definition for sustainability, which can be applied across government departments. There are cross cutting sustainability themes in all energy sectors, particularly in relation to the use of bioenergy in the heat, power and transport industries. However, a current lack of standardisation between departments means that similar situations can be treated very differently. For example, while a land owner can change land use from pasture to solar generation with no consequence, if the same farmer sells his wheat from a long established field in arable rotation he receives an indirect land use change penalty from government. Such inconsistency needs resolving. The REA currently has a sustainability working group considering this issue, including looking at the waste hierarchy, land use, indirect effects, case study analysis and the possibility of expanded sustainability principles and criteria. It is hoped that this could feed into a standard definition on sustainability for all bioenergy vectors which could possibly be administered by Treasury.

9. However, perhaps most importantly for meeting the UN sustainability targets, HM Treasury must now state the level of support it will put behind the growth of the renewable energy industries post 2020, through such mechanisms as the Levy Control Framework (LCF). The Committee on Climate Change (CCC) make it clear that the total cost of meeting the 4th and 5th Carbon Budgets is expected to be less than 1% of GDP per annum. This cost is expected to be easily offset by the social, health and environmental benefits which will result from a low carbon energy system.[3] However Treasury has so far failed to commit itself to any funding for renewables post 2020. Once they are able to take this step the relevant government departments can set out their future sustainability policies to decarbonise the energy system in line with these fiscal boundaries. This is essential for ensuring that investment continues and that all stakeholders are reassured of the UKs overall direction of travel to a sustainable future.

• Do HM Treasury’s methods for appraisal and analysis, including its decision-making horizons, the Green Book and the use of discount rates, take adequate account of long-term, global and environmental factors? What are the implications for policy decisions across Government?

10. Since coming to power in May 2015 there has been little transparency behind HM Treasury’s method of appraisal for any budget in support of a sustainability policy. The renewable industry is yet to see the assumptions used to assess the over-spend of the Levy Control Framework, which has been used to justify the severe cuts to renewable subsidy support. Similarly, there has been no firm appraisal or impact assessment provided behind the decision to remove LECs, exclude community projects from Venture Capital Schemes or abandon the Zero Carbon Homes legislation.  What is more, it would appear these decisions have been taken for short term goals. This has put pressure on other government departments to take similarly restrictive and short term views as they experience significant cuts to their departmental budgets.[4] Overall we have seen little evidence of longer term concerns, especially around the costs of meeting decarbonisation targets in the future, being included in the Treasury’s decision making process.

• Should any HM Treasury policies or processes be changed in response to the work and recommendations of the Natural Capital Committee

11. The work of the Natural Capital Committee (NCC) sets out clear principles and recommendations for financing policies to promote the sustainable use of natural capital. Many of these recommendations have direct resonance with the decarbonisation of the energy system. Below we provide a set of possible policy recommendation for Treasury based on the NCC’s proposals.[5]

12. NCC Recommendation: Rents from non-Renewable resources and Compensation Payments from Developers

13. As already discussed in previous questions the use of an effective Carbon Price will ensure the true cost of fossil fuel energy generation is realised, putting these traditional fossil fuel technologies on par with renewables and ensuring that costs continue to be driven down. The Committee on Climate Change demonstrates that if operating correctly, in accordance with the intentions of the Climate Change Act, the Carbon Price Floor should be at £23/tCO2 in 2020 and £78/ tCO2 by 2030. This will put gas generation at a price of £95/MWh for a new plant commissioning in 2025, while also ensuring they are paying for the cost of pollution. As such, renewables will be able to compete competitively with fossil fuel generation, encouraging investment in low carbon technologies and further decreasing costs.

14. To demonstrate this point, we would urge the committee to focus on Sweden as an example where a straight Carbon Tax has been very effective. Sweden introduced a carbon tax in 1990. Since then they have seen rapid growth, with GDP increasing by 60%, while at the same time, greenhouse gas emissions decreasing by 25%. For Sweden it has been a valuable tool for the rapid transition to a sustainable energy system.[6]

15. NCC Recommendation: Greater use of economic instruments (e.g. taxes, charges and permits)

16. Governmental departments should encourage Treasury to support the transition to a low subsidy energy system through the greater use of economic instruments.  With this in mind, and recognising that value for money remains a key consideration, we propose the following low carbon incentives which are built around the broader tax environment and are mechanism which are well liked by finance managers.

17. Reintroduce the use of Levy Exemption Certificates to support developing low carbon technologies

A key benefit of the Climate Change Levy (CCL) model had been the ability to leverage tax relief mechanisms through a trading market. Businesses sought out renewable suppliers in order to be exempt from the CCL tax. This helped drive demand for renewable sourced energy. To meet this demand, the supplier had to prove their energy was renewable through the purchasing of LECs, which was agreed with the renewable generator within their Power Purchase Agreement (PPA).  Therefore, the CCL exemptions benefited business consumers while also creating an important revenue stream for renewable generation, without being a direct subsidy. However, the exclusion of LECs has meant this market mechanism has been undermined and made the CCL a generic tax on all energy usage. Treasury should consider the reintroduction of LECs in order to take full advantage of its potential in facilitating sustainable growth. 

18. For example, there is a strong case for the extension of LECs to support the growth of the anaerobic digestion (AD) biomethane to grid industry. As the industry is currently in its infancy, there is a strong case for allowing LECs to be applied to biomethane production in order to incentivise investment and encourage industry growth. If such a system were introduced there would be an additional 0.193p/kWh value (current CCL charge on gas in 2015/2016) to share between the biomethane injector, supplier and consumer. This is an approximate additional benefit of £100k to the 30+ biomethane gas schemes in operation in 2016. It also has the potential to bring additional benefits to local councils by creating demand for biowaste, reducing the amount being sent to landfill. Furthermore the costs of introducing such a scheme are expected to be low with the industry already having paid for the development of the Green Gas Certification Scheme[7] (GGCS), which could form the foundation of the exemption criteria. Such models should be considered by Treasury in regards to all emerging low carbon technologies, providing a useful incentive for decarbonising the energy consumed by businesses.

19. Enhanced Capital Allowances (ECA’s) and Reduced rate of VAT

Enhanced Capital Allowances are a useful form of support for emerging and developing technologies, facilitating their transition to operating in a low subsidy market. By allowing on site renewable technologies like solar PV, Anaerobic Digestion and energy storage, to qualify for ECA’s will encourage more commercial projects to go ahead with little public fiscal support.  For Treasury this would represent a one-off up-front benefit to developers, rather than an ongoing liability for Government over 15-20 years. Similarly, the cost of such support would also automatically reduce in real terms as system prices continue to fall; reducing the risk of overcompensation in the future. Initial modelling by KPMG, commissioned by the REA, in advance of our response to DECCs FiT Consultation, indicates a benefit of 1.3p/kWh for commercial solar rooftop projects and around 0.6p/kWh for ground mounted solar when considered over an equivalent 20-year period (The modelling behind these calculations is available on request). While not large, such rates, in conjunction with the new FiT regime could ensure an attractive headline for investors bringing the tax relief on their asset purchase forward to their first year. [8]

20. Furthermore, onsite renewable technologies could also benefit from the application of a reduce rate of VAT, as currently applied to energy saving materials. This is especially true for solar and storage. While we recognise there is currently an ongoing HMRC consultation looking at how UK VAT applications comply with European state aid rules, we believe solar and storage meet the required social criteria, as they constitute an extremely important low carbon technology for households looking to reduce bills and tackle fuel poverty.[9]

21. Business Rate Relief

Relief on Business rates could also be an effective way of incentivising businesses to become more energy efficient, reducing both their power and heat demands through the use of renewable energy generation. The business rate revaluation set to take place in April 2017 should be used by Treasury as an opportunity to reduce, or provide complete relief for, the liability of a number of renewable technologies which businesses may install to reduce their energy demand. This should include reforming the rateable value so that it no longer takes into consideration fiscal support measures. Such tax relief could greatly increase business engagement with their energy efficiency standards.

22. NCC Recommendation: Reforming and eliminating perverse Subsidies

23. Fuel duty rebate for liquid and gaseous renewable transport fuels

The REA Renewable Transport Fuels Sector Group includes members predominantly engaged in the development of liquid and gaseous renewable transport fuels. 

24. Treasury should continue to look at reforming Fuel Duty by providing tax relief to both liquid and gaseous renewable transport fuels, in order to encourage their use and reduce demand for fossil fuels. Currently the duty on liquid renewable transport fuels is the same as on liquid fossil fuels at 57.95p per litre. At the same time relief is provided to fossil and renewable gas transport fuels, which currently only have to pay a tenth of the fuel duty cost currently endured by renewable liquid fuels[10]. This creates a perverse form of fossil fuel subsidy. Treasury should reconsider these tax breaks so that all forms of renewable fuels, both liquid and gaseous, benefit from the lower fuel duty and that any form of fossil fuel is not subsidised in the same manner.

25. It would also be in the Treasury’s interest to work with the DfT for the early introduction of E10, a fuel mix which includes a 10% proportion of bioethonal in petrol. The EU’s Renewable Energy Directive now states that 10% of all transport fuel must come from sustainable sources by 2020. According to the Transport Energy Task Force, E10 would be the cheapest and easiest way to achieve this[11]. It would reduce transport emissions in the UK, providing the equivalent CO2 savings of having 10.5 million Electric Vehicles on the road. The introduction of E10 should be of particular interest to the Treasury due to the fact that it lowers the energy content of petrol, requiring drivers to fill up more frequently. REA estimates suggest this would cost consumers £20 more per annum. Currently the Treasury would be the greatest beneficiary, gaining £12 in every £20 in fuel duty. Treasury should therefore consider how this increased revenue could be used to benefit those using E10 with at least half of this revenue going back to the consumer in the form of tax rebates. This would both mitigate the costs associated with transferring to E10 and incentivise its use.

26. Capacity Market reform to reduce support for fossil fuel generation

One area in which the UK is arguably increasing fossil fuel subsidies is through the current design of the Capacity Market. This mechanism is seen by DECC as securing future capacity at the lowest price, but is not considered as a subsidy; however, the fact remains that publically funded payments are provided to winning generators above the wholesale power price, regardless of the generators emissions. As a result, the last auction in December 2015 saw 650MW of new diesel-driven capacity contracted at a public cost of about £175m. We would encourage Treasury to work with DECC to consider how the capacity market could be reformed to better address the requirements of the energy trilemma, including reducing emissions.

27. We would particularly welcome the auctions redesign to allow renewable base load generation, such as storage, advanced thermal technologies and anaerobic digestion, to fairly compete within these auctions. For example, in January 2016 the REA and KPMG launched their report on “Decentralised Energy and Energy Storage”[12] which provides a comprehensive review of the status of, and potential for, storage technologies within a decentralised system.  It makes clear that both domestic and commercial energy storage are becoming viable investment in 2016.  Overall, the reform of the capacity market should allow access to longer term contracts and the removal of restrictions on ‘stacking’ revenues. This would help them compete with established diesel generation and ensure a clean and secure capacity for the future.[13]

28. Energy storage in particular could be supported by Treasury through the establishment of a uniform way of treating storage technologies so that they no longer get charged final consumption levies. This includes FiTs and Renewable Obligation recovery charges which are based on a gross import basis, even though electricity storage then exports that electricity back to the system and those fees are then paid again by the true end consumer. This results in double charging and a discriminatory cost penalisation on storage compared to demand side management (DSM) and generators (such as diesel) providing flexibility.  As an immediate solution, Treasury should stipulate that final consumption levies should be applied on net import instead of gross import (netted over an appropriate period of time such as 24 hours). This issue would also then be resolved once storage is appropriately classified, so that it is not treated as either generation or consumption.

• What is HM Treasury’s understanding of the relationship between environmental policy and growth? Is HM Treasury receptive to new evidence on this?
• To what extent has HM Treasury evaluated the business case for increasing investment in environmental and low-carbon goods and services in the UK? Is its approach consistent with other Government departments?

29. To date there has been little evidence of Treasury evaluating how their decision to reduce support for low carbon energy generation has negatively impacted on the growth of sustainable energy industries. The Treasury’s decisions over the last six months has restricted funding for renewable energy, while also withdrawing the tax breaks made available to those using renewable power or setting up community based energy schemes. As such within this parliament they have so far had a negative impact on the growth of the low carbon energy systems. To date it would seem that Treasury has not been responsive to evidence coming from both developers and investors which demonstrate that these cuts have damaged the industry and affected its speed of growth. 

30. On the other hand, we do recognise the fact that Treasury has consulted on ‘Reforming the Business Energy Efficiency Tax Landscape’ in November 2015. We are also aware that the department is working with DECC to understand where the carbon price floor should be set in the coming years as well as examine evidence in relation to new ‘Market Stabilisation Mechanisms’ for large scale renewable generation, based around the Contract for Difference model. We therefore look forward to seeing Treasury’s conclusions in relation to these work streams and how subsequent policies could help benefit the growth of a sustainable energy future.

February 2016