Energy Spending Priorities: Investors and Consumers
Debate between Angus Brendan MacNeil and Antoinette Sandbach
Mr MacNeil
My hon. Friend is absolutely correct—I have to get used to saying “my hon. Friend”, because for the previous 10 years I have been here I have not had many hon. Friends to say it to. It is a pleasure to say it. He is absolutely correct, however, because the Government have got into a way of thinking that any money spent today is a cost rather than an investment for the future. I hope that they will get away from their austerity cult idea. I often criticise them for being a penny wise and a pound foolish Government, because I think it is a mistake.
Mr MacNeil
I would be delighted to give way to my great friend on the Committee—I do have friends across the Chamber.
Antoinette Sandbach
There clearly was a need for review, which we saw last week when the National Farmers Union gave evidence to the Committee. It suggested that organisations such as the National Trust, which has huge numbers of members and vast access to resources, including massive payments under the single farm payment, should receive subsidy for installing biomass boilers in its country houses. Does the hon. Gentleman accept that there is a need to refocus and consider how we best deliver outcomes for fuel efficiency in homes for those who need it the most?
Mr MacNeil
The hon. Lady makes a good point, and if she wants to pull the very wealthy out of those schemes that might be an idea. Often, these things start by aiming at certain groups, but unfortunately the target and those who get hit are very different, and the Government often miss that.
Insulating draughty homes can save vulnerable people from fuel poverty—a problem that remains unacceptably prevalent across the UK. My Committee’s recent report concluded that the Government’s latest efforts to improve household energy efficiency had proved inadequate. Although the energy company obligation delivered many improvements, it did so at much lower rates than previous schemes. The green deal did not significantly increase demand for energy efficiency; it fell far short of original ambitions and was too complex and costly, and it also failed to address the hassle factor that can prevent customers from signing up. If anyone should know and understand the hassle factor, it is MPs after their recent dealings with the Independent Parliamentary Standards Authority, as that is an example of hassle and why people do not do things—there is something to be learned there about behavioural economics and desiring a scheme that will work for people. We in this House should have known better when the green deal was coming.
The Government’s new ideas, which include their plans for the energy company obligation in 2017, gave us cause for serious concern, and the decision to use the new obligation to tackle fuel poverty may well be misguided. The UK is the only country in Europe to take such an approach, and a scheme that charges the households it is designed to help appears inherently regressive. Alongside that, given the huge number of homes yet to benefit from energy efficiency measures, the reduced ambition of the new obligation is a major disappointment to me, to the Committee, and to many who gave evidence to the Committee.
There is now no support to help households that wish to install energy efficiency measures but cannot meet the costs upfront. The Government disagreed with our argument in their response, but we still do not know what the reformed scheme will look like. We have asked Ministers to look again at pay-as-you-save mechanisms, as well as at the infrastructure behind the Green Deal Finance Company, when considering how to assist such households. We also need demand drivers such as stamp duty and council tax reductions for efficient homes. I am pleased that the Government agreed in their response that the Green Deal Finance Company could play a role in the future. If the Government take concerted action now they can help to insulate consumers from future energy price rises. That would be money well spent and an investment, and it would prevent the need for large-scale retrofitting in future.
Antoinette Sandbach (Eddisbury) (Con)
I rise to echo the Select Committee Chair’s thanks not only to the Committee staff but to the numerous witnesses who have taken a lot of time and trouble to contribute evidence to the three inquiries we are discussing today.
I want to look briefly at the macro background to those inquiries, which is really one of climate change. We know that climate change is one of the most serious threats the world is facing. We know we need to decarbonise our energy sector and we know that that has to be done in a way whereby UK consumers feel they benefit from the change rather than lose out. All too often, the perception has been that green policies cost them. That is a real danger in the current climate, in particular after the decision last week. I have already received correspondence from constituents who are concerned that the UK may abandon its environmental targets.
The Secretary of State for Energy and Climate Change went to Paris and played a part in negotiating very ambitious climate change targets. That matters in relation to these reports, because the investor confidence report deals with the delivery of those targets, and energy is absolutely key in delivering those targets—not just the electricity that powers our homes, but the heat and transport sectors, too. It was in those circumstances and against that backdrop that the inquiries were conducted.
It is a concern that the Committee report found there has been a drop in investor confidence since May 2015, something to which the Chair alluded. In May this year, the UK had fallen from eighth place to thirteenth place in the investor confidence index. I appreciate that some of the fall may have been around the uncertainty over the referendum and that companies may have been holding back investment decisions to see the result, but it is clear that there now needs to be a real signal sent out to the investor community that deals with some of the issues raised in the report. In particular, what startled—if I can put it that way; one thinks of a horse that has been startled away—the investment community were a number of really sudden and quite unexpected policy announcements by the Secretary of State last summer. I understand—I alluded to this in an intervention—that there was a need to look at, for example, solar feed-in tariffs. Some of them gave very high rates of return. Let us not forget that it is the poorest consumers who are paying for the levy control framework in their bills, so it was right for the Government to look at that and assess how effective it was. Nevertheless, there was a very strong theme coming through the evidence we had about the lack of an overall Government strategy on energy.
The Secretary of State speaks very powerfully about the energy trilemma, but the investor community does not feel that a clear direction has been set to say this is where we are going and why. The Secretary of State explained that she wishes to remain technology-neutral. However, to look ahead and take advantage of some of the very best technologies that may come forward and deliver the best results for climate change and reducing the impacts of carbon emissions, there may well need to be some incentivisation, much as we have seen in the onshore wind sector. The Chair rightly referred to the change in Government policy in relation to the onshore wind sector and the switch to offshore. That has led to a decline in investor confidence in onshore wind farm investment, although we have not seen the same results in the offshore sector.
Mr MacNeil
Allied to that—this might sound like a constituency interest, but it does not just affect my constituency—are island contracts for difference. Having been to the European Commission to get it informally passed, the Government seem reluctant to go back to the European Commission to get it formally passed. Let us remember that island CfDs will enable cheaper generation than fully offshore, because the winds in the islands on the west coast can be stronger than those in the sea on the east coast.
Antoinette Sandbach
I am of course aware that the Scottish Government have a great deal of involvement in energy policy, in particular through their renewables obligation certificates. If they want to, they have the levers to incentivise different energy development in Scotland. It is clear that some of the announcements—on feed-in tariffs, the renewables obligation and the climate change levy—and the quick succession in which they came created uncertainty among investors.
Another theme in the report was the lack of transparency around the decision-making process. What the Chair said about the sudden cancelation of the carbon capture and storage project came through very clearly. The manner in which the decision was taken caused concern among companies that had spent many months and years putting together their bids. I understand that the Government need to look at whether they are getting value for money for the taxpayer and whether they are delivering the necessary outcomes, but it is important that we have a clear policy direction. That came through in the investor confidence report.
I appreciate that there have been several reset speeches, but again we are now in a climate where the Brexit vote has happened, yet, judging by some of the quotes used, there has been a lack of long-term vision and concerns that there will be a policy cliff edge in 2020 unless we have clarity around the future of the levy control framework and carbon price floor beyond that year. In the short term, our dropping down the renewable energy country attractiveness index might in fact mask what is really happening. Pipeline projects are still coming through, so the real impact might only be felt in 10 years, when the successor projects to those part way through the process—the ones that have consent but are not built yet—are not there.
It is all change at the moment. Every Department will be looking at our European targets and at what we might do in the future as a nation, so it is really important that the Secretary of State confirms that her civil servants are looking at the direction of UK energy policy in the context of our leaving the EU and the risks for investment, particularly in renewables.
One other item that came through very strongly in our report was the risk premium for developers. It seems that some developers have very high risk premiums and are looking for returns of over 13% or 14%. They cannot get that anywhere else in the market. It is very hard to find such high returns on other investments. I emphasise, however, that my poorest constituents—those least able to afford it—are paying for the green investment through the levy control framework.
Mr MacNeil
I hear what the hon. Lady is saying, but would she admit that previous spending has led to investment that has reduced wholesale prices and thereby benefitted consumers of the present and that investment today will do the same for consumers in the future?
Antoinette Sandbach
I certainly would, and I will come to that point in touching on the home efficiency section of the report. I am afraid that I have not had a chance to see the Government’s response—the Chair said that it only arrived this morning, but, owing to technical errors and my iPad’s failure to sync, I do not have a copy—so I do not know exactly which recommendations they have adopted. It is absolutely clear, however, that they need to set out a methodology and budget for the levy control framework going beyond 2020.
I very much welcome the fact that the National Audit Office has said that it will look at the levy control framework and “lift the veil”, as the Chair put it, on the funding, on by how much it was exceeded and on the projected spend. It is only by sending out that signal of certainty to the markets that we will encourage the investment to come forward. We need to do that in a way that is responsible to the taxpayer and provides a return to investors, albeit not an excessive one in which the taxpayer or the bill payer loses.
On the macro-level of delivery on the larger scale, I should not forget contracts for difference. We need clear signals on CfD; we need to know when the auctions will happen; we need to look at technologies such as anaerobic digestion, which have been under-adopted in the UK and have huge potential to deliver, particularly in rural areas. As others have highlighted, rural areas face real problems. Many people there have oil-fired boilers and the housing tends to be of older quality. It is vital that CfDs look at how to deliver not just the vast gas projects that are coming forward, although not yet built, but the micro-level projects, which are seen in the section of the report on home efficiency. I shall move swiftly on to that now.
Government policy on home energy efficiency has been stop-start, which has led to policy uncertainty that has damaged consumer confidence with the loss of jobs in the supply chain. I have seen that in my own constituency, where a small business has laid off a number of employees. Over 60 have been lost in this sector as a result of some of the policy changes. That has had a real impact on my constituents. Sixty people out of work is 60 people who have to re-train and learn different skills.
The energy company obligation scheme has not achieved what we wanted it to achieve. I do not praise the Welsh Government very often, but I have to say that the Nest and Arbed schemes in Wales achieved a far greater amount than the ECO did in the UK. Much could be done from the Government looking and learning from over the border. I hear what our Chair says about Scotland, too. It is clear that the ECO will be extended to 2018, but the Select Committee was very concerned that its main policy target was fuel poverty. We have questioned whether it will really deliver on that ambition.
The hon. Member for Southampton, Test (Dr Whitehead) mentioned what was happening in rural areas on solid-wall insulation. Rural areas are a particular concern, and it is quite clear that we need more data at the level of the individual household, so that ECO measures can be targeted more effectively. One major concern is the lack of data at the individual level, and one of the report’s recommendations is to ensure that we set up the sharing of data, so that home efficiency measures can be far more effectively targeted, particularly in rural areas. The evidence relating to ECO suggests that it has gathered the low-hanging fruit and has concentrated on largely urban areas where whole streets can be done at a time. It has failed to deliver in the rural areas where, as I said, housing is older, tends to be of poorer quality and tends to be solid-wall, built pre-1945.
If we are to make the gains that we need to out of home efficiency, it is key that we look at tackling the harder-to-reach homes; to do so, we need the data. For that reason, the Government clearly need to do much more cross-departmental working and they need to set up a proper database. I suspect smart meters can generate the data that will be able to identify which homes are the least efficient and will give the Government and, indeed, the energy companies the information about who is using the most and potentially who is the least efficient.
Mr MacNeil
The hon. Lady is making a characteristically good speech and raising many points on which I support her. She made a good point earlier on solid-wall insulation, and the price of oil in rural areas is at the moment beneficial in comparison to the past. With so many houses being heated like that, now, when the sun is shining—almost literally—is the time for this work to be done, as the oil price may go up again, in which case these houses will be in desperate times. We should act before the pain that could come later.
On the abandoning of the zero-carbon homes target, the hon. Lady will probably recall that that was a disappointment to many in the supply chain, who had geared up for zero-carbon homes only to be deflated on finding out that the Government had for some reason changed their policy.