Should Consumers and Taxpayers Fund Energy R&D?

The now widely recognised failure of the Carbon Capture and Storage competition, and the lacklustre performance of other R&D efforts, such as the consumer-funded Low Carbon Networks Fund (LCNF) administered by Ofgem, suggest that even arms length government funding invention and innovation is sub-optimal and may even be counterproductive.Carbon taxation, income support subsidies, and coercions guaranteeing market share are the principal impositions on the consumer used to drive low carbon initiatives, but considerable sums are also being spent by government and its agencies on Research and Development in this area. But concerns are growing that not all of these efforts are working well. The early termination of the competition for Carbon Capture and Storage (CCS) has attracted much criticism, both from the National Audit Office, and more recently from the Public Accounts Committee. £168 million pounds was spent on two competitions without any operational plant being constructed, and nothing to show for the money except “key knowledge deliverables”, to adopt the risible jargon used by the clearly embarrassed civil servants in a desperate attempt the government’s nakedness (see answer to the Public Accounts Committee’s Question 1). Unwittingly deepening this jest too deep for laughter, the department representative attempted to clinch his argument by adding that the website used to publish these “key learnings” had been accessed “several thousands of times”. In the context of global internet use, even in this very specialised area, that means it has hardly been used at all. It would seem that no one is interested in 168 million pounds worth of “key knowledge deliverables” even if they are free at the point of consumption.Forcefully driven by one of its members, Philip Boswell, a Scottish Nationalist MP formerly employed by Shell as their “contract lead” on the Peterhead CCS project, so uncertainly objective, the Public Accounts Committee was very critical of the department’s decision to cancel the second competition before completion. The decision entailed the withdrawal of the £1 billion capital grant on offer and also of a prospective allocation of between £3.9 billion and £8.4 billion in income subsidies to the plants in the competition (see theanswer to Q24), a decision which the PAC represented as a missed opportunity. But it is hard not to sympathise with government; the CCS competition was hardly a competition at all, and even if built the looming total costs to taxpayers and consumers were extremely high, with no budget to pay for them under the Levy Control Framework. Government was right to close it down, and should probably have done so much sooner. Where government is culpable is in continuing to claim, against all the evidence, that the scheme was successful, and, with doubtful sincerity, that they remain committed to CCS as part of the low carbon future. A frank admission that the scheme had not worked as expected, and that CCS will not be viable in the UK in the medium term, if ever, would have been a much better apologia because grounded in facts that are obvious to all (even, in all probability, to interested parties such as Mr Boswell).There is much food for thought in this case. The evident failure of the CCS competition motivates searching questions about the rest of government spending in energy R&D. For example, that channelled through Innovate UK (formerly the Technology Strategy Board), which has spent £1.8 billion in total since 2007, much on energy related research; Ofgem, which has overseen the spending of several hundred million, discussed below; and the Energy Technologies Institute, which has spent £223m on project funding since it was created. Even the Carbon Trust, which presents itself as an independent consultancy, was in 2015/16, the last year for which there is a report, still in receipt of nearly £8m of public funds. One might even express doubts about the wisdom of spending through the academic Research Councils, a point which locates the relatively narrow concerns outlined above in the much larger question of whether it is reasonable to expect state spending on academic science to deliver public benefit through wealth creation. Some, for example Professor Terence Kealey in his racily titled but in fact grave and serious study, Sex, Science and Profits (2008), suggests that "the public funding of research and development actually damages economic growth" because such publically funded research displaces more productive research in private businesses.No one doubts the value of research and development in the abstract or in itself. The question is whether government and its offshoots and dependents are the right agents for supporting such work.Some further light can be shed on this matter by considering, as a test case, the Low Carbon Network Fund (LCNF). Under this scheme the Distribution Network Operators (DNOs) in the United Kingdom were permitted by the regulator, Ofgem, to raise £250m from consumer bills to spend on R&D. The lack of clarity in the scheme’s objectives is neatly illustrated by description offered in the December 2016 audit report prepared for Ofgem by the consultancy Pöyry []:

The original objective of the LCNF was to help all DNOs understand what needs to be done to provide security of supply whilst achieving value for money – as GB moves to a low carbon economy – and also what role the DNOs could play in facilitating low carbon and energy saving initiatives to tackle climate change. The LCNF aimed to help DNOs explore new technologies and to develop alternative operating regimes and commercial arrangements.

Pöyry, An Independent Evaluation of the LCNF (2016), 1.

The vagueness of the verbs, “understand”, “explore”, “help”, “develop” leads one to fear that this involved a large number of PowerPoint presentations and a lot of corporate coffee and biscuits, and perhaps not much else. Was it good value for money? Pöyry tries hard to be fair, but the message of the key findings is all too clear:

• the LCNF has succeeded in encouraging DNOs to innovate and has served to move the level of innovation within the DNOs from a ‘low’ base to a ‘moderate’ level;
• LCNF has encouraged DNOs to include innovation as core business, with encouraging sign of transfer to business as usual – but this work is still progressing;
• current benefits are estimated to be approximately one third of the total funding cost;
• the potential future net-benefit from the LCNF projects is significant and is estimated to range from 4.5 to 6.5 times the cost of funding the scheme”

Pöyry, An Independent Evaluation of the LCNF (2016), 2.

This is hardly a ringing endorsement: £250m of consumer funds has only moved the level of innovatory activity from “low” to “moderate”, and innovation is still an exceptional activity not Business As Usual. The current benefits of the research are worth only one third of the £250m expenditure, and while the future benefit is much greater, this is only an uncertain potential, a bird in the bush not in the hand. The latter two facts in combination probably explain why it was necessary for Ofgem to “encourage” the DNOs with a license to sting the consumer for £250m. This was research a commercial operation would not conduct since it was too expensive in the short term and too uncertainly valuable in the longer term.However, Ofgem puts a very positive spin on this, claiming in a related consultation document that:

An independent evaluation of the LCNF scheme estimates net benefits of between £800 million and £1.2 billion when projects are rolled out by the trialling companies. The potential net benefits could be up to a six-fold increase when a GB- wide rollout is factored in.

Ofgem, The network innovation review: our consultation proposals (December 2016) p. 5).

Maybe so, and perhaps the “key learnings” of the disastrous CCS competition will also at some unspecified time in the future return more-than-compensating benefits to the taxpayers who paid so heavy a price. This incontrovertible but vague possibility is naturally attractive to government institutions seeking to justify its actions; it is, after all, an article of faith that funds expended have never been wasted. About future spending, however, responsible civil servants can be rather more candid, and Ofgem’s observations on the funding level of the Network Innovation Competition (NIC) are extremely suggestive:

We’ve considered the case for maintaining the current level of funding i.e. £90 million versus reducing the level of funding slightly to £70 million. On balance, we think that reducing the level of funding slightly to £70 million will help increase the value of the scheme from consumers’ perspective. We expect increasing the competition for funds will help to drive up the quality of the project bids. (p. 6)

This is tantamount to admitting what was evident in Pöyry’s comments on the LCNF, namely that the research project quality was not high.Furthermore, bearing in mind views such as those of Terence Kealey, we should also be asking ourselves whether public research funding may be worse than useless, even when it is delivered at arms length through competitions such as that for CCS and regulated allowances such as those disbursed by Ofgem. Can the failures and under-performance described above be avoided? Should any public funds at all be spent on energy R&D?Perhaps hints towards the answer will be found in the National Audit Office's forthcoming study, Research and development: funding and oversight across government, which is due for publication in the Autumn. This is a considerable opportunity: let us hope the Comptroller General, Sir Amyas Morse, seizes it with both hands. Underperforming R&D funding may be vastly preferable to multi-billion pound income support subsidies, but if it is crowding out better research and development in energy we are all the poorer.