Renewables subsidy cuts could increase energy bills

Investors in clean energy have been spooked by policy shifts

Sudden cuts to UK renewables subsidies have spooked investors and could lead to higher energy bills, MPs say.

Ministers said they needed to cut subsidies to force bills as low as possible.

But the Energy and Climate Change Committee says the government's sudden policy shifts on energy have hit investors' confidence.

It warns lenders may respond by putting a risk premium on future investments in clean energy.

This in turn may lead, perversely, to bills increasing not decreasing in the long run.

Angus MacNeil, committee chair, said: "Billions of pounds are needed to replace ageing energy infrastructure, maintain secure energy supplies and meet climate change targets. "The government made a number of sudden and unexpected changes to policy. This has spooked investors.

"In the same way that someone with a poor credit rating will have to pay higher interest rates when they take out a bank loan, so an energy project that is perceived to be higher risk will have to pay a higher risk premium.

Higher premium

"Any increase in the cost of capital will ultimately get passed on to consumers through higher bills."

Schroders Investment Management told the MPs: "In the light of recent changes to support mechanisms, we perceive that there is now increased policy risk and therefore require a higher premium to compensate for this risk."

The committee urged the government to produce a long-term plan to replace the previous subsidy regime, which many experts thought was too complex.

Ministers promised new policies by the end of last year, but these have now been postponed until the end of 2016, leaving many investors confused and wary.

The committee points out that ministers have cut support for solar and onshore wind, ended the "Green Deal" energy efficiency programme and cancelled a project for carbon capture and storage (CCS) - a technology the Prime Minister previously referred to as "crucial".

Siemens pointed in evidence to what they say are contradictory statements from government:

• Decarbonising at lowest cost, while halting onshore wind

• Giving local people a say in wind farm consents, but not shale gas

• Claiming to "let markets decide" when the energy market is heavily influenced by government

The committee said other factors affecting investor confidence include a lack of transparency in decision-making, and a lack of understanding of the industry's needs by the Treasury.

The MPs say this is all threatening the UK's ability to meet its objectives on energy security and climate change.

Mr MacNeil said: "Two months ago, a historic new global climate agreement was signed in Paris. But investors have begun questioning how committed the government really is to tackling climate change."

Sources close to the Chancellor say he is focused on energy prices and security, rather than climate change.

Some observers note that he was backed into a political corner by Ed Milliband's pre-election pledge that Labour would freeze energy bills if they were elected. His subsidy cuts are estimated by Department of Energy and Climate Change (DECC) to save the average household 67p a week.

Nick Molho, executive director of the Aldersgate Group, which represents green business, said: "We have to recognise that the government has faced cost pressures leading to some of its recent policy decisions.

"But the committee is right to highlight the recent dip in investor confidence. What has been particularly damaging is the lack of an alternative plan, rather than the changes themselves."

'Drifting aimlessly'

Former CBI chief Lord Turner said: "It's fairly obvious that investors look to politicians for a clear and stable policy framework, especially when they are making investments in large projects that can take years to pay off.

"It's so obvious that one wonders why a select committee has to point this out to the Treasury - but apparently it is necessary, given the continued sense that UK energy policy is drifting aimlessly."

The MPs want Mr Osborne's National Infrastructure Commission to be tasked with investigating the need for new energy infrastructure. They point out that no energy infrastructure is being built in the UK without some sort of government subsidy.

Former Shell UK chairman James Smith told BBC News the government should appoint an "energy tsar" to take the politics out of long-term investment decisions.

A DECC spokesman said: "Our priority is crystal clear - to ensure our families and businesses have access to secure, affordable and clean energy supplies.

"We have been clear that low-carbon energy sources such as nuclear, offshore wind and shale gas will play a key role in our energy future. At the same time we are taking action to keep bills as low as possible to protect consumers."

Follow Roger on Twitter.