Impact of political turmoil on energy regulation

On June 8th, the UK populus goes to the voting booths again to elect the political party which will lead the United Kingdom through Brexit and into the 2020’s. While the major campaigning points have focused away from energy, there has been a swing to the “left” on certain energy policy proposals under major party manifestos and more recently the major announcement in the US, starting the retrenchment from low-carbon policy and the beginning of “Make America Great” has the potential to re-shape the approach to decarbonisation.

What are the major talking points on energy within the election?

All of the major political parties are in agreement as to the future of the UK in continuing to develop and transition our energy sector towards a greener future. These commitments suggest that whichever political party wakes up on the 9th June in Government will not look to scale back or remove the current support mechanisms, regulations and costs associated with decarbonisation of our sector towards 2050. UKIP continue to remain sceptical of renewable energy and would seek a repeal of the Climate Change Act (2008) but without wishing to gauge the outcome of the election (given recent predictions!), it is prudent to suggest that they will not influence Government decisions post-election.

All of the major political parties have made clear statements towards the cost of energy in the domestic sector, suggesting a “left” leaning approach to reducing energy costs through price controls, caps and potentially large-scale nationalisation of the sector. Political statements on energy cost in periods of social insecurity tend to become more prolific as promises of savings and a conscious approach to protecting consumers are seen as steps towards votes. Whether we see price controls, tighter regulation of domestic tariffs or a full-scale creation of a publicly owned regional supplier(s), there has been a lack of clarity on dealing with the uncertainty over rising energy costs for the non-domestic sector.

While rising costs and affordability are a concern within this election, there appears to be a distinct lack of clarity as to the core issue underpinning affordability – the value of non-energy costs, largely based on support mechanisms, levies and taxes put in place under Government policy decisions.

How has energy affordability changed and how can a future Government influence this?

According to industry research, the impact of Government policy decisions and our adoption of a decarbonisation strategy in:

  • the Commercial sector has seen an increase in electricity costs of 119% since 2004*, of which 49% of this is due to decarbonisation policies;
  • the Manufacturing sector has seen an increase in electricity costs of 104% since 2004*, of which 52% of this is due to decarbonisation policies (excluding those organisations who receive support).

The chart represents a sample Beond client and their actual energy costs in 2015 & 2016, with our latest insight view to 2019 (October year). Therefore, while wholesale prices in this forecast are falling year-on-year, the affordability issue currently being discussed by the major political parties is caused by rising taxes and levies.

Impact of political turmoil on energy regulation

If we make the assumption that the wholesale prices do not change materially then the main political parties have failed in their manifestos to address the real issue facing this sector – how to continue to adopt a decarbonisation policy funded largely through consumers, while ensuring affordability. This is on the premise that a price cap, the creation of publicly owned utilities or another form of price control will not deal with the issue of rising non-energy costs. The solution to lower energy costs in all sectors is based on low-carbon technologies reducing in cost quicker than anticipated, creating a funding model which does not directly impact consumers (such as indirect country taxation) or simply retreating from supporting decarbonisation of our sector (again assuming the wholesale market remains rangebound).

Has Trump’s decision to “Make America Great” by removing the USA from the Paris Accord become a defining moment in climate change policy?

This week the USA joined Nicaragua and Syria in rejecting the Paris Accord, signed in 2015 to represent the global ambition to control rising temperatures and reduce global emissions.

A major part of his campaign for the Presidency the focus was on putting American workers first and protecting American jobs, and in certain states the decline in the coal industry has affected jobs. Therefore, in order to protect votes Trump has declared the USA’s removal from the Paris Accord.

As part of the current administration’s “Make America Great” objective, Trump has already begun dismantling the US Clean Power Plan, which was aimed at reducing emissions from coal-fired generation plants.

While clear that they intend to remove themselves from regulations in order to reinvigorate coal jobs, amongst other environmental regulations, clear statements have been made that the USA intends to renegotiate the terms of the Paris Accord in order to find a more mutually beneficial arrangement, although if a more agreeable arrangement cannot be agreed they will accept nothing.

However, given the commitment from the remainder of the participants (more notably the larger emitters and more developed economies including China) to the current Paris Accord it is unlikely that we’ll see a renegotiation. With 3 and a half years left before the USA can formerly leave the Paris Accord we are likely to see:

  • Localised and regional support for climate change ambitions in the USA which may contradict Government policy. This is particularly evident given the commitment by major global firms to combat climate change and the economic benefit of climate change linked industries over the past 3 years.
  • A lack of growth in the coal sector given the relative economics of coal generation vs. other technologies (and corporate sentiment), although it is noted that coal production for alternative uses may increase output.
  • Fear that a decline in decarbonisation could push renewable energy jobs to other countries, such as China – ironic given Trump’s statement that “The concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive”.

The remainder of 2017 will be interesting to see what steps the USA takes in delivering Trump’s campaign rhetoric and how not only the world will react but more importantly how the major industrial & commercial sectors and each State will react to national policy.

Why political decisions are a major driver to a consumer’s energy strategy and how Beond are helping?

Given that in 2017, an average of 59% (sample client data) of a delivered electricity bill is made up of levies, taxes and network charges it is critical for all energy consumers to understand the current and future political, legislative and regulatory landscape in order to understand how this cost can be managed.

As we move towards 2020 it is clear that increases in protectionism and the widely debated energy affordability issue will create challenges which need to be addressed.

This focus on non-energy costs does not suggest less of a focus on supplier negotiation and wholesale hedging as this remains a key part of any procurement strategy. In addition, a range of indirect legislation aimed at enforcing minimum efficiency standards (both on buildings and energy assets) are starting to increase in 2017 and towards 2020.

Beond is an award-winning consultancy for our innovative approach and our software solutions. More recently we’ve been shortlisted for Industry Expert of the Year at the forthcoming Energy Live News TELCA awards 2017. Our experienced team can:

  • Work with clients to design a clear procurement strategy, delivering real proven value.
  • Help understand the future risk and opportunity of all legislation, regulation and political decisions.
  • Create a long-term approach to energy efficiency, advising on existing and emerging technology.
  • Working with our clients to help interpret legislation & regulation to their own commercial advantage.