Are renewables the answer to the "trilema"?

by Luke Morris. Published Fri 26 Jun 2015 11:40, Last updated: 2015-06-26
Solar is leading the drop in the cost of renewables
Solar is leading the drop in the cost of renewables

Luke Morris of leading chartered accountancy firm Larking Gowen here discusses how the cost to the consumer is the main driver in shaping the Government’s energy policy.

Earlier this month I chaired a round-table of the ICAEW Energy & Natural Resources Group. We had deliberately scheduled a discussion on UK government outlook and policy for the renewables sector, four weeks on from the general election. When planning, we didn’t know we’d have a new Energy Secretary in the form of Amber Rudd. And we weren’t expecting to be staring down the barrel of a referendum on the UK’s membership of the EU at some point before 2017! So the timing and topicality couldn’t be any better.

Away from the policy, it’s clear to me from most of the businesses I deal with that renewables are now no longer a fad but a fact of life. A fact becoming super-charged by advances in power storage technologies and reducing hardware cost (especially solar). And, if you’re ever looking for the direction of travel in a technology then it makes sense to “follow the money”. A recent piece in the Economist stated that China spent $56bn on renewables in 2013, more than all of Europe put together.

But China’s progress illustrates the policy hurdles in the UK starkly. Whilst capital cost of course remains one of the biggest challenges when it comes to progressing renewables projects, how easy life must be when you don’t have developmental and regulatory milestones and targets to concern yourself with!

The real issue in the UK is the government energy “trilema”. Namely to keep the lights on (secure supply), to manage peoples’ bills and keep consumers on side (reduce costs), and to drive forward the low carbon agenda (the EU 20:20:20 targets). Which, if any, will give?

The round-table consensus was that it would be suicidal to be the government of the day when the lights go off, so we’re either going to have to get used to paying more for our energy or something will need to give on the renewables targets (and, keep in mind that only Malta and Luxembourg currently have a lower share of renewable energy than the UK at the moment).

The political wind is currently unsettled, and that does nothing for the nerves of those invested heavily in renewables. The Conservative manifesto, dare I say perhaps never designed to be deployed in its unalloyed form, was clear on its lack of enthusiasm for onshore wind. The Renewable Obligation (RO) subsidy scheme is now almost certain to close a year early in April 2017, being replaced by a new subsidy regime known as Contracts for Difference (CfD) under the wider market reforms. That said, new Secretary of State Amber Rudd seems broadly pro-renewable. And just this last week, leading figures from the renewables industry have been making significant project announcements and pressing the positive case for wind: an established technology with massive scope for jobs in regional supply chains.

Looking at it with an accountant’s head, energy takes up a much larger proportionate share of poor households’ budgets compared to those of other income brackets. The same is true in comparing SMEs with multinationals. The big six has been handsomely incentivised for years under ROs whilst the implications for SMEs—the backbone of the economy—are overlooked. Increasing energy costs for them in order to subsidise renewables is potentially damaging in unforseen ways: energy use for SMEs is so fundamental it takes precedence over other items of expenditure. More spent on energy, less spent on R&D; and innovation, fewer people employed, slower business growth…

It’s a fine line. My gut feeling on the trilema is that overriding government preoccupation will remain with consumer cost. And so it should.

Cambridge graduate Luke Morris joined Larking Gowen as a partner in 2011. With substantial experience in accounting and financial reporting, audit, corporate governance, controls advisory and transaction support, he focuses mainly on the group’s corporate business. He leads its specialist energy team and heads up the energy group of MHA, the UK-wide association of independent accountants and business advisors.

His article was first published here.

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