There can be no doubt that the implementation of the Paris Agreement, which enters into force on 4th November 2016, is a historic achievement that follows 23 years of attempts to reach a truly international climate agreement. Individual parties have pledged their own emission reduction targets as part of the agreement and are now implementing policies to meet these.
While the UK has set ambitious climate targets, both as part of Europe and domestically, how it will plan and fund the transition to lower emissions remains uncertain. The new government will seek to approach this in the most cost-effective manner it can because the costs of low-carbon policies are already significantly adding to consumers’ electricity bills.
A recent report from the National Audit Office (NAO) is critical of the government’s management of the Levy Control Framework (LCF), the mechanism designed to control the costs of three consumer-funded mechanisms – the Renewables Obligation (RO), the Feed-in Tariff (FiT), and Contracts for Difference (CfD). According to the NAO, the cap on subsidies set for 2020/21 of £7.6 billion is set to be exceeded by 14.5% or £1.1 billon. One of the contributing factors to this increase in costs was the fall in wholesale electricity prices, which meant that higher payments had to be made to generators with CfD agreements. The scheme is designed so that generators are paid the difference between the agreed “strike price” and the average market price for electricity. Higher than predicted levels of generation also contributed to higher costs.
The CfD mechanism is intended to replace the RO, which has already closed to some new entrants and will be closed for all new application from March 2017. However, it has transpired that the early award of eight early contracts for large renewables projects in 2014 has used all the space in the framework not already allocated to the existing RO and FiTs. As a result, the scheduled October CfD auction was postponed until early 2017.
As the LCF is due to end in 2020/21, the NAO recommends that new options are developed and assessed for controlling the costs of renewables in a formal control framework, particularly in light of the growing importance of CfD, which will help to build investor confidence that is essential for the pipeline of low-carbon projects. In seeking the most cost-effective means of meeting emission reductions, the government may take heed of a report this month from the World Bank, which shows that if a global carbon trading scheme was in place by 2050 it could reduce global mitigation costs by more than 50%.