Newsletters from No 10: 9 February 2010
I wanted to update you on a few announcements the Government has made in recent days.
As I hope you will have seen, the Government has responded robustly to recent media stories. Ed Miliband has made it clear that the IPCC must improve its practices to ensure the highest standards of peer review. But a very small number of disputed claims cannot overturn the overwhelming body of scientific evidence on which global concern and agreement has been based. Governments around the world are acting on climate change because there has been a very broad and long-standing consensus among the scientific community that the dangers of not doing so are real and very large; and because at the same time there are huge employment, security and quality of life benefits from moving to a low carbon economy and society. These reasons remain unchanged by recent events and the Government will be working hard over the coming months, alongside the scientific community, to maintain public understanding and support for low carbon policy.
FEED-IN TARIFFS FOR SMALL-SCALE LOW CARBON ELECTRICITY GENERATION
Last week DECC published the feed-in tariffs (FITs) that will apply to household and community-scale low carbon electricity generation, starting in April. Providing cash payments for electricity consumed and exported to the grid, the FITs are designed to incentivise households, firms and communities to install small-scale renewable technologies such as solar PV, anaerobic digestion, small-scale wind and microhydro. A pilot programme is also being established for micro-CHP. The tariffs will be index-linked, tax-free and fixed for two years to provide certainty for investors, after which they will be progressively reduced over time. In setting the tariffs the Government has sought to ensure sufficient incentive while containing overall cost, and we are pleased at the overall reaction of stakeholders to the balance struck. Full details are at http://tinyurl.com/mbjk6b.
The FITs scheme is an important part of the Renewable Energy Strategy (RES), published last year (http://tinyurl.com/mshlgl), which sets out the Government's plan to increase the proportion of the UK's energy coming from renewables to 15% by 2020. That target will require around 30% of electricity to be renewable (compared with 5.5% now). Most of this will be delivered through the Renewables Obligation, but for generation capacity under 5MW the FITs will now provide a more accessible incentive. The plan envisages around 780,000 installations being deployed under the FITs by 2020, generating around 2% of the UK's electricity, so this is a very significant change in both the structure of electricity supply and in household investment. (For comparison: in Germany, which introduced feed-in tariffs in 1991, there are a little over 300,000 installations now.) As well as individuals, the Government is keen to ensure that businesses, the public sector and communities, especially in low income areas, take up the scheme. There are particular opportunities in social housing. While the savings which can be generated will obviously vary according to circumstances, a well-sited 2.5KW solar pv installation could earn a householder £900 in 'cashback' and a saving of around £140 on their electricity bill. And at the same time we expect the programme will provide a major source of new jobs in both the manufacture and installation of the various technologies.
RENEWABLE HEAT INCENTIVE
Alongside the FITs DECC has published its consultation on the Renewable Heat Incentive, to be introduced in April 2011 (see http://tinyurl.com/yggbujk.) This is the parallel mechanism to provide financial support for the deployment of renewable heating technologies, such as solar thermal, ground and air source heat pumps, solid biomass, biogas and bioliquids and renewable CHP. The scheme will incentivise renewable heat generation at all scales, from households and businesses through public sector buildings such as schools and hospitals, to district heating schemes and industrial processes.
Since heat is responsible for 47% of the UK carbon emissions, this is a crucial area of policy. It's also an almost wholly new one: we believe that the RHI will be the first incentive scheme of its kind in the world. Due to the accessibility of North Sea gas, less than 1% of the UK's heat generation is currently renewable: to meet our overall 15% renewables target we estimate that will have to rise to around 12% by 2020. So a major expansion is needed. The RHI plan envisages 1.7m household installations by 2020, with a further 150,000 or so in the business, commercial and public sectors. There are particular opportunities to benefit low income communities in areas off the gas grid (we will be specifically consulting later this year on measures to ensure low income households can take advantage of the RHI). So this is set to become a huge investment programme, with correspondingly large job creation impacts. It will also save an estimated 60m tonnes of carbon pa by 2020 and significantly reduce dependence on imported fossil fuels.
More details of the RHI funding mechanism will be published in the Budget, while the integration of both the FITs and RHI into the Government's wider plans for energy and energy efficiency investment in the housing stock will be set out in the Household Energy Management Strategy to be published shortly.
OFGEM'S PROJECT DISCOVERY
There was a bit of a media flurry last week surrounding the publication of Ofgem's 'Project Discovery' report. From the Government's point of view the report provides a useful assessment of the challenges facing the UK energy sector over the coming period. They are the same challenges the Government recognised in our Low Carbon Transition Plan for 2020 last year, and which are the subject of two projects which will report at the Budget - DECC's 2050 Roadmap work, announced last summer, examining possible pathways to a secure, decarbonised energy mix by 2050; and the joint HMT-DECC Energy Market Assessment, announced in the PBR, looking at the market reforms needed to deliver our low carbon and security of supply goals over the long term.
As Ed Miliband said last week, the Government recognises that in the longer term we are going to need a more interventionist energy policy to deliver the scale of low-carbon investment we need. But that is not, contrary to statements being made in various quarters, a reason to throw doubt on Britain's security of supply in the near term. As this winter has shown, the UK's gas market is working well (and there are 22 new gas storage projects at various stages of development, which show that it is not the problem some have painted it to be either); this winter's electricity margins are at a healthy level; and there is already enough generation capacity under construction or with consent to replace that closing in the next six years. So there is not an issue of short-term security of supply; but there are important questions about investment over the long term. Those will take very careful analysis and consultation, to which Ofgem's work, alongside those of the Committee on Climate Change and others, will contribute. We will have more to say on this in the Budget.
LOW CARBON COMMUNITIES
Not a big announcement but a really good one: the second group of winners of the Government's Low Carbon Community Challenge. A total of 22 communities will benefit to the tune of up to £500,000 each to install energy efficiency measures and community-scale renewable energy generation - cutting energy bills, saving carbon, reducing fuel poverty and galvanising community ownership of clean energy. See http://tinyurl.com/ya5fujp for the full list: there are some brilliant projects here.
Responses welcome as always.
With best wishes
Special Adviser to the Prime Minister
10 Downing St
London SW1A 2AA