The Levy Control Framework (LCF) looks likely to be tested again in the coming years, partly due to renewables output continuing to exceed expectations. As the Government’s control on green policy costs, it has already triggered at least one policy change in recent years. While its operation will limit the scale of cost increases consumers will inevitably face, it also puts at risk some of the principles of the overarching energy policy. The LCF highlights the fine line the Government has to tread between energy security and decarbonisation commitments, and its desire to keep consumer bills in check.
The LCF is essentially the Department of Environment and Climate Change’s (DECC’s) budget for energy policies. Rather than being a cap on spending, the LCF defines a limit on how much economic impact the plans will have. It does not cover all of DECC’s functions, but rather – as its name suggests – focuses on policies which have a direct ‘levy’ or pass-through element to consumer energy bills. When introduced through the 2010 Spending Review, the LCF included the consumer costs of the Renewables Obligation (RO), Feed-in Tariffs (FiTs), and the Warm Home Discount (WHD). However, subsequent updates to the LCF in Summer 2013 have removed the WHD, which is now considered among “non-electricity policies that are levy-funded.” The LCF will not include future costs of the Capacity Market (CM), but it will cover the consumer impacts of the Contracts for Difference (CfD) which will replace the RO.
The Government is committed to encouraging the growth in low-carbon generation, not only to meet environmental objectives, but also to help ensure security of supply. Between April 2015 and March 2020 the annual cap in the LCF will rise to £7.6 billion. There is also a 20% headroom built into the LCF which sets the threshold requiring the Government to amend energy policy to address the budget being broken. By 2020, if the upper limits of this headroom are used, the LCF could be costing consumers over £9 billion.
In recent years and for the near-term at least, a large percentage of the costs in the LCF have been to support the RO. The scheme has supported the generation of nearly 50TWh of renewable energy in 2013, with even greater levels forecast for this year. Wind accounts for the largest proportion of the RO output, at over 60%, and the increasing costs have been addressed by gradual changes in the RO banding. However, a more strident change in recent RO policy has been the removal of support for solar projects with a capacity over 5MW. This follows a major increase in solar investments, particularly in March 2014, when over 700MW of capacity was accredited, covering over 800 sites. In the last 12 months, after one of the sunniest summers on record, over 1GW of new solar capacity has become operational.
While the change in solar policy will help ensure RO costs remain within the tolerances of the LCF, it also increased uncertainty over future policy. One of the bedrocks of recent energy plans was to improve investment conditions for new low-carbon technology. One of the best ways to provide this is with cost certainty. Indeed, much of the Government’s Electricity Market Reform (EMR) has been focused on reducing market uncertainty, but changes in support triggered by LCF budget constraints counteract this..
Unfortunately, this uncertainty over LCF operation is only likely to get worse. While the costs of the FiT and RO are increasing, this is largely aligned to capacity as investments increase. However, the CfD will guarantee a low-carbon generator a set net revenue, based on Strike Prices. Support required will be the difference between the Strike Price and prevalent wholesale rates; the lower the wholesale price, the more ‘top-up’ the Government will have to provide, which in turn will be funded through consumer energy bills. If the additional funding gets too much, then further policy changes will be required. If this occurs, the certainty enshrined in the EMR will evaporate and with it future investments in low-carbon technology. Ultimately, this could leave consumers paying the maximum allowed under the LCF, but without the benefits in security of supply that the energy polices had promised.