Reading the news this week, I was struck by the similarities between Chris Huhne, the Energy and Climate Change Secretary, and Marcus, my year-old baby boy.
Marcus and I like to build towers out of small wooden blocks. I tend to focus on trying to create elaborate and aesthetically pleasing structures whereas Marcus is easily distracted by bright primary colours and tends to pull out the blue blocks thereby unintentionally collapsing the whole thing. This week’s announcement of a review of the subsidies for renewable power may be Huhne’s blue wooden block, a small seemingly irrelevant issue which risks bringing down the whole UK renewables structure.
My reading of the position is as follows: to encourage investment in renewable energy the government introduced Feed in Tariffs. These meant that for every megawatt of power produced by solar or wind energy, the developer would receive a payment from Ofgem even if they consumed the power themselves. Or to put it another way, a blatant subsidy for micro generators. These subsidies are available to everybody including the public sector although the latter have been depressingly slow to realise what was on offer. This is why David Cameron has a wind turbine on his house but my local school doesn’t.
However the more entrepreneurial members of the private sector quickly discovered that the tariff for ground-based solar was too generous compared to domestic or commercial buildings and were planning to cover Cornwall in solar panels to take advantage. In a panic, the government has announced plans to reduce the tariff for ground-based solar and presumably hopes that the investment community will laugh indulgently at the ministers’ foibles, shrug their shoulders and refocus their efforts on putting panels on warehouses, schools and office buildings.
However, I am not so sure it will be that easy. I adore Marcus and don’t feel that attached to the wooden structures that we build so don’t really care when he makes them wobble. In contrast the international community has no feelings at all (either negative or positive) for the UK government but is fiercely, desperately attached to its own money.
Developing any form of renewable scheme takes six to 12 months and thousands of pounds in planning fees, environmental permits etc. By pulling out the blue block of ground-based solar tariffs, the government is saying: ‘Sorry chaps, all that money is now wasted.’ But, much more significantly, it is also signalling that, like little Marcus, it may do this again and again as the whim takes it. It is ground-based solar today; it may be the yellow wind block next year or the green tidal block the year after.
Suddenly the whole structure of tariffs looks alarmingly fragile and this will make investors very nervous about the UK renewables industry. And we can’t afford this. At something like 2% of installed capacity, the UK still has the second lowest rate of renewable power in Europe but we still face the same target of 20% by 2020.
The fact that the solar tariff rate was driving unprecedented investment from a global community of bankers should have been a source of celebration in Whitehall not knee-jerk panicking in response to complaints from middle-class second home owners on the Cornish Rivera. This change is a rare occurrence of a climate change initiative being reversed by a national government because it was actually successful.
So why should the public sector care about any of this? Because by virtue of its buildings, council houses and windy open spaces, the public sector in aggregate is the biggest consumer of power in the UK and has the potential to be the biggest developer of micro generation.
If the government succeeds in spooking the Impala like investment community, it risks not only large-scale solar development in Cornwall but also the more laudable attempts by councils to save money and tackle fuel poverty through micro generation of heat and electricity. The same investor who lost money trying to fund the ground-based solar schemes is also funding schools-based wind turbines and domestic panels on council houses.
It is important to remember in all of this that from the investor’s perspective, the UK is just a small rainy island somewhere off the north coast of Europe. Renewable energy is a global business and the money tends to follow the carrots of tariff regimes across the world.
If Huhne insists on making the UK renewables sector a scary and unpredictable place then investors will gather up their toys and go and play with somebody else. We don’t have a monopoly on the wind, the sea and the rain. When a Canadian pension fund wants to invest in renewables it will focus on countries with a reliable tariff regime, a reasonably stable currency, a name they can pronounce and somewhere nice for the deal completion dinner.
This sounds glib but it really is that simple. The weather is universal, mechanics of the tariff regimes are pretty similar across Europe and the same technology works wherever.
In the same week that the government recklessly shook the foundations of the English system, the Northern Irish government cemented theirs by doubling the tariff for power produced from anaerobic digestion, a way of turning slurry into power. As a result I am writing this blog from Belfast not London having spent the morning with German engineers, English bankers and Irish pig farmers.
So, in conclusion, I think that Huhne’s ill-judged intervention this week was the wrong blue brick to pull out at the wrong time. The UK is still miles behind everybody else in the race to meet the 20% renewables target and the last thing we need to do is to put the brakes on and by doing so make our bankers nervous.
I don’t mind if little Marcus collapses my carefully constructed version of the Taj Mahal because he is my baby son and I love him. We should all be somewhat more concerned if Chris Huhne risks doing the same thing to our nascent renewable energy industry.
Michael Ware is corporate finance partner at BDO
