Event Summary: A Budget for Growth?

A publication from Aldersgate Group

Joan Walley MP, Chair of the Environmental Audit Select Committee opened the meeting, “It’s Budget Day!”

She posed the question to the speakers and audience, “how green was the Budget for you?”

Dr Gordon Edge, Director of Policy, RenewableUK responded that “there are things in there that sound pretty good, that could be green, but we don’t know yet.”
He warned that there are many unknowns in the Budget, such as with the Green Investment Bank (GIB). “It’s great that it’s going to have some more money, it’s great that it’s going to be a bank – eventually – but we still don’t know what form and function it’s going to have.” The GIB is not due to be able to borrow additional funds until 2015, but on this point Dr Edge felt “if we know it’s coming then we can prepare for it, and certainly when it comes to offshore wind, the real ramp-up in demand for that cash is going to be post-2015.” However he cautioned, while offshore wind will clearly be an important part of the GIB’s work, “we shouldn’t forget the needs of the new green technologies,” and it will be important for the GIB to offer products for “those early technology projects, which are the next step for wave and tidal.”

The uncertainty applies to the other announcements. The “carbon price support, great, but it needs to go beyond 2020 [and] what happens to the proceeds?” Similarly, “enterprise zones are interesting.” They could be green, “if they are focused in the right place, at the right targets.” The decisions around planning could also be positive, but we need to know what sustainable development actually means and is it realistic to expect more planning applications to be done and dusted within a year? It’s certainly not the experience of the wind industry that that’s going to be an easy task.”

Dr Edge also highlighted the “disjoint between what’s in the Budget and what we need,” around skills. “There’s a lot of talk about new apprentices and lots of money being thrown at training in skills, but we have a National Skills Strategy that was put out before Christmas which has no direction towards priority areas like renewable energy; it’s supposed to be entirely industry and learner-led.” Until the Government draws up a comprehensive skills strategy, getting the right number of people with the right skills into jobs will remain a struggle.

Kevin McCullough, Chief Operating Officer, RWE Npower felt that some of the statements of intent in the Budget are “quite hollow” and it will take time to understand the details.
The carbon floor price has been set to be £30 per tonne of CO2 by 2020, which is “much higher than we expected to see,” and directly benefits those who are already low carbon generators. “Rather than levelling the playing field, I think the statement on the carbon floor price has actually skewed the playing field,” disproportionately benefitting those generators who are already low carbon. The extra cost will be passed on to electricity consumers, “so the price is likely to rise, so those who are already beneficiaries of having a low carbon base will also be able to charge more and be taxed less, so I don’t think it’s particularly fair.”

Mr McCullough welcomed the changes to the planning system, “but we need to get serious about the need for infrastructure renewal” and this cannot be done without involving use of new land. The wind turbine must be the most innocuous use of new land, “taking about 1-2% of the land mass that it yields the wind from, in a country that has 40% of all the wind available for generation in Europe. We need to be using as much of it as we can.”

Mr McCullough also highlighted the omissions from the Budget: “What was missing or hidden beneath the headline are things on energy efficiency, things on moving us forward in terms of the kilowatt hours that we don’t use, incentivisation for things like renewable heat and microgeneration and more socially acceptable tariffs that allow those kind of technologies to become the breakthrough technologies that they deserve to be.”

Louise Moore, an Aldersgate Group member and partner at Herbert Smith LLP (but expressing her personal views), felt that the Budget contained “some very good news in terms of the framework for green infrastructure, but the flesh now needs to be put on the bones.”
“This is potentially the green light that we’ve been waiting for. I’m hoping that my optimism bears out over the next few years.”

She welcomed the additional capital promised for the Green Investment Bank, but warned that the details need to be clarified as soon as possible. “I think it is very important that we have certainty in terms of the bank’s objectives, its powers and products and a pathfinder model, so that investment decisions going forward can be made against the clearest of policy backdrops.” She noted that other legal issues, including its constitution and state aid considerations, needed to be resolved as soon as possible so that the Bank can indeed be operational from 2012 and borrowing from 2015.

She argued that the announcements on planning were “a pleasant surprise on the whole”, in the context of facilitating and fast-tracking low carbon development, although the presumption in favour of sustainable development and what sustainable development is intended to mean in this context and how this is all going to operate, again lacks clarity at this stage.

Overall, Ms Moore’s [low carbon developer and investor] clients have been positive about the carbon floor price, given that until now “the lack of certainty about a future carbon price and the low carbon price of the market, has constantly thwarted low carbon development.”

Paul Ekins, Director at the Green Fiscal Commission welcomed the establishment of the carbon floor price, and was pleased that energy generators consider it to be high, although “for me it’s a bit low if we’re wanting to kick start the low carbon economy”.
Nevertheless, the carbon floor price will be helpful as “a long-term signal going through, which will give just a little bit of assurance, and obviously will make high carbon generation more expensive.”

The change to fuel duty was a disappointment, “because clearly petrol needs to become more expensive so we can wean ourselves off dependence on oil.”

The Green Investment Bank (GIB) will now be capitalised to the tune of £3bn, which is anticipated to leverage £15bn of private sector funds by 2014-2015. Ofgem has reported that we need £200bn investment in the energy sector by 2020, so “£15bn is a start, but it’s a relatively small start and the rest of that money will have to come from somewhere else.”

Professor Ekins’ concern for the GIB was that “it seems to me there is a perception it can reduce policy risk, and policy risk is one of the major risks that face banks in the area of low carbon lending, given that carbon only has the value that policymakers put on it.” There is a possibility that the GIB, once operational, could generate its own certainty by embedding itself in the economy to provide insurance against the next government altering its remit. The year when the GIB is due to start borrowing – 2014-15 – is also likely to be coming up to a general election, so Professor Ekins suggested that the GIB must have entered into contractual agreements with clients by that time, to ensure that any alterations would carry a high cost to the government.

Professor Ekins was less optimistic than Ms Moore on the announcements on planning and read from the Budget text: “?There is to be a new presumption in favour of sustainable development so that the default answer to development is yes.’ Now I’ve been doing sustainable development for a few years and to me the default answer to development is, is it sustainable?, and the usual answer to that question is no.” Another cause for concern is that there are two processes underway in this sector: there is major infrastructure planning and then there is the localism bill, giving power to people at the local level who may, or may not, want development of any kind.

“This is certainly not a step change to a green or low carbon economy.” It could be considered an incremental step in the right direction, so “we have to hope that the will and the imperative and the logic of the green economy pushes governments further and faster than this Budget.”

Peter Young, Chairman of the Aldersgate Group highlighted the “equivocal” nature of the Budget as his greatest worry.
While campaigning for the last election, George Osborne said “that under his term, the Treasury would no longer be a foe of the environment, it would be an ally.” The experience with the GIB has not borne this out. The capitalisation for the bank has increased but “we do not welcome the equivocation regarding its ability to act like a bank.” Equally it is questionable whether the delay in the GIB’s borrowing until 2015 was necessary; private sector financial surplus is at record levels as consumers and businesses retrench and there is a great deal of unemployed resource, making the next few years ideal for the GIB as it could operate without being at risk of competing with the private sector. “There is real lost opportunity here.”

Moreover the Budget’s explanation for postponing the GIB’s borrowing is that time is needed to ensure debt is falling as a percentage of GDP. There are two inconsistencies in that argument: “firstly, the peak for the debt as a percentage of GDP was going to be two years earlier”, so why can the GIB not operate sooner? Secondly, looking at the definition of the figures behind the Budget, “you’ll see that there is a complete exemption of public ownership of RBS and the other banks that were taken into public ownership … so why do we have to put the GIB in? Looking at comparable European banks none of their governments include that liability on their balance sheets.

Mr Young identified similar equivocation with the carbon floor price. It has been applied to the “electricity generators who have been singled out alone on this and there’s no indication as to when the rest of the economy will have to consider this burden as well.” Alongside this announcement came the fuel duty changes, “where popularism gives a completely counter message as to how we should price carbon and that equivocal nature is riddled all the way through [the Budget].”

The announcements suggests that this Government “has just about understood how the green agenda applies to our energy sector and our energy use; it hasn’t actually realised that this is economy-wide.” Many of the elements in the Budget – enterprise zones, taxation – “could have had that tint of green in them without really making a lot of difference to the policy direction”.

Mr Young’s final point was on regulation, because “there was a lot of talk about deregulation in the budget.” This is despite the fact that nearly all the mechanisms discussed at this event “have some component of regulation in them because the environment is a fundamental market failure.” Regulation is being spoken of as if it is a universal bad. “Good regulation is good, and bad regulation is bad. We need to get rid of the bad stuff and have more of the good stuff.”

This event was supported by RenewableUK and Herbert Smith.