Isra-Mart srl : Could the Treasury seize control of low carbon policy?

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The renewable energy industry is increasingly fearful that the Treasury is seeking to tighten its grip on the UK's low carbon energy policy through a new "control framework" designed to impose a cap on the Department of Energy and Climate Change's (DECC's) levy-funded spending.

The framework has gone largely unreported since it was announced as part of March's budget. But renewable industry insiders are deeply concerned that, after well-documented turf wars between the Treasury and DECC over the formation of the Green Investment Bank and the cap on feed-in tariff incentives, the Treasury is now seeking to formalise its control over a wide range of low carbon energy policies.

"It is part of the Treasury's efforts to reclassify renewable obligation certificates and feed-in tariffs as public spending that it can then control," said one source. "That has been the case since the coalition was formed, but now it is trying to formalise that arrangement."

Another insider confirmed that the move was fuelling fears that Treasury interference in low carbon policy-making will increase as a result of the framework.

"We've already seen it happen with the shock changes to the solar feed-in tariffs," she observed. "The control framework spells out more interference from the Treasury, and more influence for its view that the best way to bring down short-term energy bills is by cutting support for long-term renewable energy investments."

The control framework and accompanying documents confirm that the new rules initially cover the Renewables Obligation, Feed-In Tariffs and Warm Home Discount, all of which the independent Office of National Statistics has classified as "taxation and spending" that as such is overseen by the Treasury.

Significantly, the documents raise the prospect of the government's planned electricity market reforms also being covered by the control framework, noting that it is "too early to say whether the new Electricity Market Reform policies will be classified as levies and therefore subject to the control framework".

The primary goal of the control framework is to impose an ongoing annual cap on levy-funded policies which ensures that renewable energy and carbon targets are met as cost effectively as possible.

However, it also gives the Treasury considerable control over DECC policies.

For example, the control framework states that, while DECC retains the right to change policies, it will need Treasury approval where changes will result in a breach of the Treasury cap; "could create pressures leading to a breach" of the cap; could "increase long-term cost pressures beyond those previously envisaged"; and could set a "potentially expensive precedent".

It also states that the Treasury must approve any policy changes that are "novel or contentious", meaning that virtually any levy-related DECC policy change could be deemed to require Treasury approval.

Moreover, an accompanying question and answer document prepared by DECC confirms that "where a policy is forecast to overspend against the envelope, DECC will have to develop plans to bring spend back within the cap".

It adds that these changes would have to take into account progress towards renewable energy targets, could not be retrospective, and would have to follow all required procedures, such as statutory consultation and parliamentary scrutiny.

Commentators are now convinced that the framework informed the government's controversial fast track review of solar feed-in tariffs for all installations with over 50kW capacity, which has been widely blamed for undermining investor confidence and is currently facing a potential judicial review after solar companies alleged that the government failed to follow its stated procedures for changing policies.

"The key question is whether this [control framework] is a discretionary power or signals deeper involvement from the Treasury in energy policy," said one renewable industry insider. "The danger is that we have the Treasury taking a short-term view and trying constantly to lower electricity prices by slashing support for low carbon generators."

Others are questioning whether the Treasury has sufficient understanding of energy policy to play a constructive role in ensuring that the UK meets its carbon and renewable energy targets.

"Where there is growing unhappiness is that in a sector as dynamic and complex as energy we are having constraints imposed by a Treasury that does not have the necessary expertise," said one industry source.

The control framework also threatens to further damage relations between DECC and the Treasury, which are said to be at an all-time low following Chancellor George Osborne's lobbying for the government to water down carbon targets recommended by the Committee on Climate Change, as well as last month's well-documented Cabinet row over the AV referendum between Osborne and Energy and Climate Change Secretary Chris Huhne.

However, speaking at a meeting of the Energy and Climate Change Committee of MPs earlier this month Huhne downplayed the implications of the control framework on feed-in tariffs and other policies, insisting it was part of a "totally appropriate" agreement with the Treasury.

"[It is] perfectly legitimate for the Treasury to have a control overview jointly with us and that is exactly what we have agreed," he said. "It is totally legimitimate if we are to sustain public support for the sort of policies that I believe are necessary to support renewables and energy savings. It is absolutely essential that we are clear and transparent about what is going on and that will involve policy costs being passed on to consumers."

A spokeswoman for DECC insisted that the control framework would not undermine the department's ability to drive renewable energy investment while ensuring that renewables targets are met.

"The government is committed to meeting its renewables targets; that is why we have secured £3bn for the Green Investment Bank in the recent budget and will also be introducing the biggest reform to the electricity market since privatisation which will help generate billions of investment to bring about the transition to a low carbon economy," she said.

"As you would expect, but particularly in the current economic climate, any government would want to see this money spent cost effectively, not least to ensure the costs to consumers are managed properly. The framework we have agreed with the Treasury reflects these aims."