Renewable Energy Foundation

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DECC on the Verge of Breaching Treasury Spending Limits

Over the last few days the press has been reporting general accounts of a leaked letter from the Chancellor, George Osborne, to Ed Davey, Secretary of State at the Department of Energy and Climate Change, suggesting that the Treasury has attempted to sabotage the green revolution by seeking dramatic reductions in subsidies.

The text of the letter has now been made available in full on the Guardian website: "George Osborne Letter from to Ed Davey on Gas and Windpower".

The contents are, however, not quite what previous reports suggested. Far from being inflexible and obstructive, the Chancellor appears to be moderate and conciliatory, though his letter is indeed explicitly committed to a governing principle:

"We need to set out an approach which puts the cost to consumers at its heart."

In pursuit of this surely desirable outcome Mr Osborne is willing to compromise with DECC and accept a reduction of only 10% in the subsidy to onshore wind (which is equal to a reduction of only 5% in total income, since subsidy is about half of the overall income of an onshore wind farm) provided that further reductions in subsidy are scheduled or that a date is set for a review to consider such reductions. Given the clear evidence of over-subsidy in the system this is a considerable concession. Indeed, some will feel that he has been overly generous.

The Chancellor also asks that the Feed-in Tariff should be closed if that becomes "necessary", by which he means if costs become excessive. Given the scale of adoption in the last year, and the subsidy burden already entailed for the next two decades this precaution is entirely reasonable.

In addition, Mr Osborne makes a number of unexceptionable remarks about the need to ensure that the UK keeps its options open with regard to gas, rather than committing to a fast trajectory towards a lower carbon electricity system that only makes economic sense if gas prices are very high. In essence, he is saying that at present DECC’s polices are a very risky gamble on the future price of gas, and that the Treasury would prefer a more flexible approach. Such a position should not be controversial.

Interesting though all this is, the most important part of the letter is its first paragraph, which as far as we know hasn't been widely discussed. The Chancellor writes:

"First and foremost, while your proposals achieve some savings we will still be paying more than £500m more to support renewable generation in 2013-14 than we collectively agreed was affordable."

In other words, DECC has failed to keep consumer costs within the Control Framework for Levy-funded Spending, as agreed by DECC and HMT last year and published in December 2011.

The total spending permitted in the period  2013/14 by the Control Framework was just under £3.2 billion. It would seem that DECC's current plans or expectations would see a spend of about £3.7 billion, a 16% overspend less than six months after the Control Framework was agreed.

Treasury will probably have concluded that DECC has simply lost control of levy-funded subsidies to renewables and can no longer accurately predict their levels even a short distance into the future. This may be one of the reasons behind the unexpected resignation last week of Moira Wallace, Permanent Secretary at DECC.

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