July 2, 2017
Richard Folland

Post-Election Enlightment: Where Does The Minority Conservative Government Go On Climate And Energy?

Despite some attention on the Conservatives’ so-called “price cap”, and Corbyn’s Labour proposing a form of energy sector industrialization, energy policy was a dog that mostly failed to bark during the recent election campaign. That was even more the case where climate change was concerned, notwithstanding President Trump’s attempt to put the issue on the political agenda by his decision to withdraw the US from the Paris Agreement.

Since the election on 8 June, the state of British politics and the position of the British Government has been in a state of flux, to put it mildly. Now that Theresa May has reached an agreement with the Northern Ireland Democratic Unionist Party (DUP) that will provide some stability at least for the short-term and has allowed the Queen’s Speech to pass, it seems a good time – for all those in the business, civil society and policy world who take an interest in such things – to examine the prospects for climate and energy policy under this new government (assuming it lasts at least into 2018, which is not guaranteed).

Even if debate did not really catch fire, the manifestos did reveal some stark differences between the main protagonists. Conservatives and Labour may have been in agreement on a variant of the price cap. Otherwise, they projected competing policy approaches. The governing party – even if they are now pursuing a more interventionist line than Margaret Thatcher would ever have contemplated – took a business-as-usual approach, supporting fracking, more nuclear and maximizing North Sea resources. The Tories also made clear their opposition to onshore wind farms, although there was a clear endorsement of the offshore sector.

Labour, by contrast, were more forward-leaning on a low-carbon approach, demonstrating an intent that it should be in the mainstream. As part of their “sustainable energy policy” (based on the energy trilemma), Labour were more full-throated on the benefits of the low-carbon economy and renewables projects. They also said that they would ban fracking because of the risk of lock-in to high-carbon projects, and made a more overt connection between investment and an industrial strategy.

This is all worth factoring into the new post-electoral landscape of uncertainty and volatility, in that the Government’s “supply and confidence” agreement with the DUP may not necessarily extend to energy policy, and that the views of Labour and the small parties might have a disproportionately stonger influence on the direction of policy. They have arguably already had an impact, in the light of the Government’s decision to exclude fracking from its Queen’s Speech programme.

Before going on to consider what might be the policy priorities over the next few months, we should note that just last week, the portfolios of BEIS Ministers were finally confirmed. The positive news, which we already knew, is that Greg Clark will provide some continuity – and hopefully complete some unfinished business – by remaining in place as Secretary of State. Less reassuring is that Nick Hurd and Jesse Norman, having made favourable impressions as Climate Change and Energy Minister respectively, have moved on to other departments, to be replaced by Claire Perry and Richard Harrington. Perry at least has some ministerial experience, from the Department of Transport, and it of course not Harrington’s fault that he is the 19th Energy Minister in as many years. But this will inevitably mean further delays on departmental business as the new ministers get familiar with their portfolios.

The other dominating factor is, of course, Brexit, which casts a shadow over climate and energy policy as it does over the whole of Whitehall. This piece will return to Brexit later on.

Investors would claim that BEIS and related departments can have no bigger energy-related priorities than the twin subjects of the Government’s Industrial Strategy and BEIS’s Clean Growth Plan (if this is in due course what its emissions reduction plan will be called). However, politically, there may be no urgent or daunting challenge than air pollution in British cities. Theresa May’s majority administration was, exceptionally, compelled by Court order to publish its Air Quality Plan in early May during the election campaign. The plan was met with widespread criticism for its basic approach: passing responsibility for action to local authorities with little in the way of concrete proposals or guidance, and no additional funding. As Client Earth and other indefatigable campaigners have made clear, the pollution in our cities is a public health emergency. Given the lack of anything substantial to say on this in the Queen’s Speech, the Government is likely to come under major pressure from parliamentary and non-parliamentary sources to take firmer action.

The way that the air quality and climate change debates have come together (most conspicuously in China, but also increasingly in the UK) has been striking over the last 12 months. If pollution is the most urgent challenge, then the investment community and all sorts of other stakeholders are becoming restive with what they perceive to be the Government’s “dithering” over its plans to back up its commitment to Fifth Carbon Budget targets under the Climate Change Act. The Clean Growth Plan had been Nick Hurd’s baby pre-election, and seemingly not long from publication then. The change of Ministers will cause a further delay – Q3, probably September, is now the latest time being suggested – but this plan will be vital when it does finally issue, for the following reasons:

it is meant to provide the evidence that – despite signals to the contrary, notably the thrust of the manifesto itself – the Government does want to make good its oft-repeated commitment to the Climate Change Act by looking beyond what has already been achieved on decarbonisation, notably in the power sector, to addressing some of the “tougher nuts” on carbon reduction;

one of those tougher nuts, as an excellent report from Policy Exchange has just reminded us, is the transport sector. The Government up to this point has shown mediocre leadership in this area, failing to devise a coherent, joined-up strategy which can support the development of the electric vehicles sector, bring down emissions and clean up the air pollution caused by conventional vehicles – a reminder again of how climate and air quality are now coming together;

it might finally plug the glaring gap in government energy policy since the collapse of the Green Deal, the vaunted flagship energy efficiency scheme under the coalition government. The Government desperately needs a new policy direction in this area, taking advantage of technology developments and the consultation on a smart flexible energy system that it ran before the election.  Over the last two years, announcing the abolition of the Carbon Reduction Commitment (CRC) energy and emissions savings scheme and scrapping the commitment to zero-carbon homes, it has been heading in the opposite direction.

Other uncertainties prevail where the Plan is concerned. One of the policy areas that Nick Hurd was deliberately over was: whether the UK should remain part of the EU Emissions Trading System (ETS) when it leaves the EU; and, if it does leave, whether the Government should create a UK-only ETS or develop the carbon floor price mechanism to go the whole hog with a carbon tax. The March Budget put the whole area of carbon pricing on hold until the next Budget, which will probably be in November. A further complicating factor relating to the ETS is that Brexit D-Day in March 2019 is out of sync with the end of Phase III at the end of 2020: an example of where judicious transitional arrangements might come into play, perhaps.

We are also still awaiting the results of the consultation that the Government ran pre-election on its proposal to phase out coal power on the grid by 2025. By all accounts, they remain committed to doing this; but confirmation of that decision would provide some much-needed certainty for the power sector. It would also surely confirm the transformation now taking place in real time, exemplified by the hot summer day of 19 June when low-carbon sources (wind, solar, nuclear) were responsible for an unprecedented 70% of UK power generation that day.

It’s conceivable, linked to the coal phase-out, that the Clean Growth Plan will also have some news about carbon capture and storage – Greg Clark is reportedly supportive. Despite the carrot of potential government support stretching back to the last Labour government, no CCS project has got off the ground in the UK, while progress is being made in countries such as Norway, the US and China. There is indigenous engineering expertise; but time is moving on if CCS is to have the impact at scale on carbon reductions that its advocates claim it can make.

Underpinning so much of this agenda is the financial support that the Government, ie HM Treasury, is prepared to give to low-carbon technologies through its mechanism of the Levy Control Framework (LCF). At the last Budget, Treasure announced that the LCF would “be replaced by another set of controls later in the year”. No announcement has yet been forthcoming, but this will be extremely important, in particular for the direction of travel it would imply for investors.

Apart from the Clean Growth Plan, the other two big indicators on the direction of policy – at least up until the autumn, when Budget considerations will start to loom large – will be the Industrial Strategy and of course the Brexit negotiations.

The Industrial Strategy is another initiative that was put on hold by the Election. For a political party that had for nearly four decades followed the mantra of “the market knows best”, the establishment of a strategy to set direction for British industrial policy was a big deal. But its scattergun approach did not feature energy as prominently as might have been expected, let alone propose that the low-carbon economy be at the heart. Attention to these two fundamental points would provide some welcome clarity and definition to the Government’s approach, and set some policy direction for investors: isolated support for electric vehicles is not enough, it needs to be part of a coherent, long-term approach. But all this will depend on what the Government heard in the consultation and whether they are able and willing – bearing in mind their weak political situation – to be clearer about their priorities.

The final version of the Industrial Strategy will also prove whether this government still has an appetite for large infrastructure projects. Heathrow 2.0 and HS2 garner much media attention, but what the strategy says about the Hinkley Point C nuclear reactor should be of major interest, in the light of reports that it will be years late and over budget, and the fact that it was not mentioned in the Tory Party manifesto.

It has become a truism, but that is the case because it’s true: Brexit will dominate governmental and parliamentary business over the next two years. It will have an impact on energy policy as over other sectors of the economy and, even if the Brexit pre-negotiations have given no sign that energy will be high up the agenda, there will be at least two problematic issues.

First, discussions about the future trading relationship between the UK and the EU have particular resonance for British access to the Internal Energy Market. The Government’s increasing dependence on cross-border interconnectors (which might become even more important if Hinkley Point C fails to deliver on time or somehow collapses altogether) to supply electricity and gas might conceivably be imperiled if there is an unsatisfactory post-Brexit deal (or, worst of all possible worlds, no deal).

Second, the May administration will surely be mindful of how the Irish dimension could trip them up in the Brexit talks, especially now they are reliant on the DUP for parliamentary support. An important part of this dimension is the all-Ireland electricity market. The Single Electricity Market (SEM) has been an important part of the peace legacy, and people in Northern Ireland the government in the Republic will be anxious to ensure that its multiple benefits are preserved.

In conclusion, setting aside its shaky political predicament, the Government has much on its side to drive a refreshed energy policy vision that could please investors and consumers. It has a positive story to tell on emissions reduction: as coal has come off the grid, the UK is leading the way in Europe, recording the largest decrease in emissions among the EU-28 in 2015. Despite lukewarm governmental support and concerns about enough investable projects, low-carbon energy production and consumption is on a positive trajectory, bolstered by a public opinion which consistently shows considerably higher levels of support for wind and solar than for shale gas (and, incidentally, a minimum two-thirds public support for the Climate Change Act and UK alignment with the Paris Agreement). Although the Government and the media niggle away about energy prices, a new Climate Change Committee report – with a reminder amongst other things about the value of (EU-driven) energy savings polices – has shown that bills have actually come down in real terms since 2008. There also signs that the City of London is waking up to the opportunities in green finance, and the need for institutional investors to address climate risk: as evidenced by the City’s Green Finance Initiative.

Despite these favourable conditions, this Conservative administration still seems stuck in a half-way house: between the modernising wing of Ruth Davidson, acknowledging the impact of clean energy and new technologies; but constrained by a right-wing that is instinctively suspicious of wind farms and still harbouring some old-fashioned climate deniers in their ranks (a perception which the appointment of Michael Gove at DEFRA will not have assuaged). Hence the mixed messages which in turn have a negative impact, especially on finance and investment which is looking for policies that are clear, predictable and for the longer-term. A Prime Minister without much interest in the energy and climate agenda, and who lacks authority, is unlikely to be much help. The Government needs to project a joined-up energy policy vision for both domestic and European reasons; whether it is willing – and in the current political environment, able – is another matter.

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