Last month it emerged that George Osborne had ordered the energy department to carry out deeper cuts to onshore wind subsidies in a move designed to appeal to Tory backbenchers – 100 of whom have signed a petition to that effect.
While Decc is already planning a 10 per cent cut to “Rocs” (renewable obligation certificates) the Treasury was seeking cuts of up to 25 per cent, it was widely reported.
But I have been handed a letter from the chancellor to Ed Davey, energy secretary, which suggests that the wind subsidies are only a microcosm of a wider battle over the green agenda raging in Whitehall.
Last week the review of Rocs was put on hold; Davey and Osborne were clearly unable to reach an agreement over how far to cut the subsidies.
The letter from the chancellor suggests that Osborne was in fact open to the smaller cut in onshore wind Rocs: but only in return for some much larger concessions from Davey.
As I report in today’s FT, here are key extracts from the letter:
“On balance I am content to start with a reduction to 0.9 Rocs (from 1 Roc)… However I am only prepared to agree this if we also agree a further reduction in Rocs in this Parliament or a review point in 13/14 to assess costs and the scope for such a reduction.”
The letter then continues with several other demands from Osborne to Davey, all of which are likely to enrage the green movement. I’m told that Davey considers some of the suggestions unacceptable as they would undermine investor confidence, not only in renewables but also in nuclear – at a critical time for negotiations over new nuclear plants.
The chancellor’s private demands included:
A demand for the Lib Dem energy secretary to make an all-out statement hailing the use of gas for energy.
(Osborne expects Davey to produce a) statement which gives there is a clear, strong signal that you regard unabated gas as able to play a core part of our electricity generation to at least 2030: not just providing back-up for wind plant.
He then goes on to call for an explicit rejection of a 2030 carbon goal, which would legislate for low-carbon energy production.
This is something that Tim Yeo’s energy committee calls for in a hard-hitting report today. Osborne believes that this new target would prevent investment by the gas industry into new infrastructure. “What George Osborne cares about most is a credible gas strategy,” says one ally of the chancellor. “But he wants an energy policy that gives credibility for both renewable investors and gas investors.” In the words of the letter:
(Osborne wants) agreement that we will not set any further decarbonisation or deployment targets beyond those we already have, for example 2030 targets for electricity emissions or renewable deployment. Setting inflexible targets on the energy sector is inefficient.
Osborne also urged Davey to insert a clause into the forthcoming energy bill to take powers to shut down the “feed-in tariff” (FiT) subsidy scheme in the future if necessary. That would only be a contingent power but is likely to undermine investor confidence in a system that is already shaky after the solar debacle at the turn of the year.
(Osborne says it would be) Sensible to include provisions in the forthcoming energy bill to take powers to shut the Feed-in Tariff scheme in the future, should that become necessary.
The letter goes on to make clear that Osborne wants the UK to hit its 2020 renewables goals by using “renewable trading” – in other words, not only from domestic generation but also from paying for renewables in other countries. That will be seen as a cop-out by green groups.
What can we read into all this? It would appear that Davey has grasped that the row over onshore wind, though important, involves only tens of millions of pounds. And he does not seem prepared to shy away from other green commitments in order to preserve the onshore subsidy. (Which would only be a temporary reprieve).
The question is now how far Nick Clegg is prepared to step in against the chancellor in order to preserve the Lib Dems’ green credentials – and how determined Osborne is to show the gas industry that it is still welcome in the UK. This battle is going to run and run.
Jim Pickard
Kiran Stacey