Climate and energy policy under the new Conservative Government: What do we know? What can we predict?

by Inline Policy on 03 Jun 2015

The dominant media narrative on climate and energy policy under the Coalition Government had become something of a cliche. The Liberal Democrats were ‘the green heart’; the Tories were ‘arch-advocates of oil and gas’; the Lib Dems, led by Secretary of State Ed Davey, were the ‘champions of disruptive utilities companies’, taking on the power of the Big 6; and the Tories were ‘in the pockets of the big energy companies.’

So now that the shackles have been removed, some say that the majority Conservative Government can give free rein to its instincts and make a clean break from the compromise approach of the Coalition. As ever, things aren’t as clear-cut as that - energy policy under this new Government will on the one hand be predictable, but may contain surprises as well.

The Ministerial appointments bode well

There has been plenty of (positive) comment on Amber Rudd’s appointment as Secretary of State at DECC. But I make no apologies for underlining this point - if business and market participants are seeking a balanced, constructive, non-polemical approach, the new Secretary of State is as encouraging an appointment as David Cameron could have made. Ms Rudd will provide continuity (from her job as junior Climate Change Minister in the last administration); she will be serious on climate change, as already evidenced by the emphasis she is placing on the importance of the Paris conference at the end of the year; she will take a common-sense approach towards energy security and a challenging one on energy prices, including the costs of renewables (an impression reinforced by Guy Newey’s appointment as her Special Adviser - Guy regularly challenged the cost-effectiveness of renewables subsidies when we was at the think-tank Policy Exchange).

The new Secretary of State’s closeness to George Osborne, as his former Parliamentary Private Secretary, is well-documented. The significance of this, now that she has ascended to the top job, is that DECC will have more clout with Treasury. In addition, Andrea Leadsom’s appointment as Ms Rudd’s deputy at DECC is also worth remarking on: Ms Leadsom’s financial sector background (cf also Ms Rudd’s career as an investment banker) will bring a different and more rounded perspective to the DECC team, who have at times seemed to lack weighty finance and economics expertise. Ms Leadsom will also reinforce the Treasury connection, which can only help.

The Queen’s Speech contribution is balanced, but is focused only on the short-term

As they deal only with legislation forthcoming over the next 12 months, Queen’s Speech programmes are intrinsically short-termist. After all the activity associated with Electricity Market Reform and the Energy Bill in the last Parliament, DECC’s legal draftsmen and the energy industry will probably breathe a sigh of relief at the limited scope of the proposed Energy Bill in the Queen’s Speech tabled last week. It contains three provisions, none of which are contentious:

  • to ensure there will be affordable and reliable energy for businesses and families;
  • to give the Oil and Gas authority (OGA) the powers it needs to become a robust, independent and effective negotiator, and enable it to maximise the economic recovery of oil and gas from UK waters;
  • to change the law in line with the manifesto commitment to give local communities the final say on wind farm applications.

Basically, the Bill is carrying over business from the last Parliament (the OGA), plus the measure on local planning approval for wind farms is an anticipated nod to two Conservative party constituencies: its right wing, which is inherently suspicious of clean energy and ambitious climate policy, and the countryside.

So what do we know?
  • Energy pricing will be at the top of this Government’s agenda, just as it was under Ed Davey and the coalition. The Conservative manifesto emphasised their commitment to promoting competition in order to keep prices as low as possible (and also their pledge to back “good value energy”). The manifesto also singled out the Competition and Markets Authority review of the energy market, so the publication of its final report - due out this November/December - will be a signal moment for the Government’s energy policy, as their approach remains to eschew interventionist policy levers (which was in fairness also the Lib Dem approach on pricing, although not of course Labour’s) - except for using the bully pulpit (if reports of Amber Rudd reading the riot act to the Big 6 on consumer prices are to be believed.)
  • The Paris COP will be a very big deal for this Government and they will be prepared to spend political capital at the EU and international level to advocate an ambitious agreement. For example, at David Cameron’s press conference with President Hollande in Paris last week, he spoke about three things: EU reform (obviously); national security (where the UK and France have long-standing close links; and the Paris COP. The equation is very simple for Cameron’s Government: it’s an excellent opportunity for the UK, on an issue where it has long been a leader, to punch above its diplomatic weight; and a respectable deal in Paris- where other counties do their bit -  ought to reduce pressure from Tory right-wingers to rein in domestic green polices.
  • North Sea oil and gas will be a major priority - witness the Queen’s speech commitment. The steep drop in the oil prices over the last nine months has not surprisingly strengthened calls from the British oil and gas lobby for increased support from the UK Government. The coalition administration, led by George Osborne, reacted in the March budget with a package of measures to ease the tax burden for companies operating in the UK Continental Shelf. The industry is continuing to go through difficult times and a Conservative Government is likely to be responsive to that.
  • Although mention of fracking may have been conspicuously absent in the Queen’s Speech,  there is little doubt that the Government will wish to press ahead with the development of an indigenous shale gas industry, as highlighted in the Tory manifesto. The manifesto also said that local communities should share the proceeds of of shale gas through benefit packages. It will be interesting to see what the Government does in this area over the coming months  - including the idea of a Sovereign Wealth Fund in the North of England - in the light of polling indicating that the British public remains somewhat ambivalent about onshore oil and gas exploration. The market has its view: on the day of the Tory election victory, the share price in the UK fracking company IGas rose.
  • Onshore wind is going to encounter a rocky road in this Parliament. The Conservatives pledged in their manifesto to end any new public subsidy for onshore wind. Ms Rudd’s challenge will be how to manage expectations from the Tory right wing that the Government will make good on that pledge, while fending off accusations that she is damaging a sector which is not only generating the cheapest source of renewable energy but also delivering high-value jobs. A sign of the turbulence we can expect came in a Daily Telegraph report this week that DECC will close down the Renewables Obligation early, which could hit many onshore wind projects where planning permission has already been secured. In addition - and this is where DECC’s relationship with Treasury will be crucial - the new Government will have to set a new levy control framework out to 2030, a policy framework vital to an industry which has to make its investment plans for the long-term and where eyes will be focused on how much and where subsidy support is directed. On top of this, some analysts are saying that DECC’s subsidies budget out to to 2020 may already be committed (hence the Telegraph story), so where can money on new renewables projects be found, especially if the new Secretary of State is keen to talk up both solar and offshore wind? Hard choices (and some political expediency?) may have to be made, if that square is to be circled.

What can we predict beyond the near-term?

Predicting outcomes is never easy, whether it concerns economic forecasting or policy decisions. But a combination of what is and isn’t in the Queen’s Speech, plus policies already in train, can give us an idea of what will be in Ms Rudd and her colleagues’ in-trays for the medium-term:
  • Ed Davey and Greg Barker, the prime movers behind UK climate and energy policy in the last Parliament, freely acknowledge that the coalition’s flagship energy efficiency programme, the Green Deal, was a failure. The Tory manifesto was generally silent on energy efficiency, but the Government will have to come back to this as initiatives on energy efficiency should in theory be best able of all to hit the energy trilemma sweet spot: tackling prices, boosting energy security, and reducing carbon emissions.
  • Linked strongly to its approach on energy efficiency, the Government will have to manage the massive smart metering programme schedule for the next five years. DECC says that most domestic UK households will have smart meters installed in their homes by 2020. This is a flagship programme which will be high up Government objectives.
  • The steady revival of the EU Emissions Trading Scheme, allied to language supporting carbon pricing which comes out of the Paris COP, is likely to put pressure on the Government to consider the future of the carbon price floor, introduced by the Treasury during the last Parliament primarily as a revenue-raising measure.
  • If the future of the carbon price floor is one potential headache, the setting of the Fifth Carbon Budget (covering the period 2028-2032) next year might be politically problematic for the Government, for two reasons. First, the Climate Change Committee (CCC), currently running a consultation on this, might give advice in December this year (as it is bound to do) which is simply too ambitious in terms of targets and low-carbon scope (the Government can of course ignore that advice, but it’s not that easy to do with a body as well-respected and credible as the CCC). Second, Paris may not deliver a sufficiently ambitious climate deal, which might pressurise the Government to row back on strong targets in the Fifth Budget, on the grounds that the UK should not be out ahead of the others (an argument which the Chancellor has used in the past).
  • Policy on coal might also prove to be a challenge, an issue linked to the wider one of the UK’s overall energy security. If the three-party leader (Cameron, Miliband, Clegg) declaration on climate change pre-election campaign was a welcome reminder that climate change is by and large a bipartisan subject in British politics, it was perhaps more surprising to see the Prime Minister sign up to a pledge to end the use of unabated coal. International developments (Chinese reduced usage, the carbon bubble debate, the collapse in the share price of many “pure play” coal companies) are likely to apply significant pressure to the coal sector over the next five years. EU legislation means that many coal powered stations will come off line by 2020. The manifesto pledged significant expansion in new nuclear and gas, but if that doesn’t happen to the extent that the Government would like, concern will mount about how an energy security gap around the turn of the decade can be plugged.

Political Factors will never be far away

Beyond the market and international issues jostling for attention, the two dominating British political themes - the Union and the European Union - will have a particular relevance to UK energy policy.

First, the re-emergence of the SNP as a significant force at Westminster will further spotlight attention on domestic energy policy arguments. The Conservatives and Scottish Nationalists are obviously of one mind on maximising North Sea oil and gas; but onshore wind and the subsidy regime, which the SNP strongly supports, could be a battlefield between the two parties. Throw in the fact that the SNP will chair (identity as yet unknown) the Select Committee for Climate Change and Energy and inevitably want to use that position to secure beneficial outcomes for Scotland, and we could be set for some interesting debates

The question-mark over EU membership casts a darker cloud. Polices on both climate change and energy, where we benefit from cross-border co-operation with our European partners, are areas where one can advance legitimate arguments for “more Europe” rather than less. In this context, the next five years will witness serious attempts by the EU significantly to step up that co-operation (grid connections, gas interconnections, removal of remaining trading barriers) through its high-profile Energy Union initiative. A decision by the British people to reject EU membership would pose major questions about the benefits of a European single energy market. Further speculation would be fruitless at this point, but it’s a space which will need to be watched.

In summary, there’s no doubt that the Conservative Government will have plenty on their plate - and a particular challenge in striking the right balance between support for decarbonisation and support for the fossil fuels and energy intensive sectors, given the external political and market factors.  Watching them navigate that tricky path will be fascinating, but also vitally important in terms of equipping the British economy for the 2020s.

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Topics: Conservative party, Energy and environment, UK politics

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