Everything Bagel Liberalism comes to the UK

Why I'm sceptical of Contracts for Difference reform

The main way the UK government supports investment in renewable electricity generation is by offering developers 15 year-long fixed-price guarantees. Contracts for Difference (CfDs), as they are known, effectively de-risk investments by ensuring that the price paid per MWh does not fall below a pre-agreed level. The contracts are, in effect, extremely valuable insurance policies for developers. 

At the moment, CfDs are allocated on the basis of a competitive reverse auction – whoever offers the lowest price wins. This now looks set to change. A press release from the Department for Energy Security and Net Zero released this week states:

The government is now seeking evidence and views about reviewing applications not just on their ability to deliver low-cost renewable energy deployment, but also based on how much a renewable energy project contributes to the wider health of the renewable energy industry.

These reforms could see applicants considering overall costs alongside other ‘non price factors’ - such as supply chain sustainability, addressing skills gaps, innovation and enabling system and grid flexibility and operability - when submitting their bids, which could help drive investment in the sector, grow the economy and boost the country’s energy security. 

More investment in supply chain sustainability, for example, would help to reduce its carbon impact and access the resources and materials it needs to deploy sustainability at scale in the longer term. Investment to address the skills gaps would help to train the technicians needed to deploy ever larger renewable energy generation stages. 

When I heard this announcement, it made me think of a recent New York Times piece by Ezra Klein on “Everything-Bagel Liberalism.” If you have never had an “Everything-bagel” before, they are essentially bagels with a little bit of every topping. Wikipedia quotes a Newsday article from the late 70’s “for those who can never decide if they want plain, salt, poppy seed, sesame seed, garlic or onion, there's something called the everything bagel, which is topped with all of them.”

In the piece, Klein references a gag from the movie Everything, Everywhere, All At Once – an everything bagel that is literally topped with everything: “All my hopes and dreams. My old report cards, every breed of dog, every last personal ad on Craigslist, sesame, poppy seed, salt, and it collapsed in on itself.” The lesson for policymakers? Don’t add too much to a good thing.

Klein illustrates the problem of applying the Everything-Bagel approach to policymaking with the $39bn CHIPS Act. The law offers large subsidies for semiconductor manufacturing in the US and aims to reduce America’s reliance on Taiwan for critical chips.

This is an issue of vital national security, yet to obtain the subsidy semiconductor manufacturers must jump through all manner of hoops. As a result, the law is much less effective at its stated aim, securing a reliable supply of semiconductors, than it otherwise would be. Klein writes:

Page 11, for instance, encourages a pre-application that includes an environmental questionnaire “to assess the likely level of review under the National Environmental Policy Act.” Page 20 mandates that applicants prepare “an equity strategy, in concert with their partners, to create equitable work force pathways for economically disadvantaged individuals in their region,” which should include “building new pipelines for workers, including specific efforts to attract economically disadvantaged individuals and promote diversity, equity, inclusion and accessibility.” Page 21 asks for a plan “to include women and other economically disadvantaged individuals in the construction industry,” “strongly encourages” the use of project labor agreements and sets out requirements for “access to child care for facility and construction workers.”

“Pages 23 and 24 ask applicants to detail how they will include minority-, veteran- and female-owned businesses, as well as small businesses, in their supply chain and offer seven bullet points detailing how this might be done, including dividing supply chain requirements “into smaller tasks or quantities to expand access” and “establishing delivery schedules for subcontractors that encourage participation by small, minority-owned, veteran-owned and women-owned businesses.” Then there are requirements for “a climate and environment responsibility plan,” as well as community investments in areas like transit, affordable housing and schools.

Everything bagels are a relatively unknown concept on my side of the pond. I don’t think I’ve even seen one for sale in the UK – though a quick google reveals that Waitrose now stock them. But the everything bagel approach is common when it comes to policymaking.

Now there is, admittedly, some case for reforming CfDs in relation to the grid. Unlike many European countries, wholesale electricity prices in Britain are set at the national level and don’t account for the network costs of transporting that energy to where it is most needed. Until we move to such a system, there’s a case for factoring this into any support for renewable investment.

But moving away from competition on the basis of price alone will have an obvious consequence – higher prices. To what extent prices will be higher is an open question, if non-price factors such as whether or not turbines are made domestically are weighted heavily, then the impact could be substantial. The key thing to remember is that there are no free lunches here. And at a time when energy costs are unaffordably high for households and businesses, we need to ask: “Do we really want higher electricity prices?”

Yet, the problem goes beyond higher prices alone. How do you weigh up a commitment to train 1,000 apprentices against pledges to invest more in R&D objectively? Moving to more complicated and less transparent criteria will make choices about who gets what more subjective. Competitive pressures will decline.

The key advantage of a move to non-price factors – for politicians (and lobbyists) – is they keep subsidies off the books. This is what the political scientist Steve Teles calls the kludgeocracy. There is plausibly a case for direct subsidies for investments in “supply chain sustainability” or funding to “train the technicians needed to deploy” renewables. And granting CfDs to projects that would otherwise miss out on price alone is basically equivalent to subsidising such investments directly. But, the problem is that it is a type of subsidy that is much, much harder to scrutinise. Five years on, there will be no National Audit Office into whether the extra cost to bill payers was worth the extra investments in training.

I suspect one reason why CfD reform is attractive to the Government is that it does not require new legislation. Developing targeted individual schemes may present better value for money, but such schemes need to be designed by officials and voted through parliament, so kludges like this will keep happening.

One area where the preference for non-legislative kludges is having a damaging impact is in procurement. The government spends an awful lot of money buying goods and services from businesses and charities – around £300bn! In fact, procurement is one of the most powerful policy levers to shape outcomes the government has. Whether they are intended to or not, the conditions the government insists on have massive knock-on effects on the economy. For example, requirements that businesses have a track record of delivery effectively freeze startups out of many tenders, leading to fewer startups forming than they otherwise would.

Businesses bidding for public contracts are no longer assessed on just cost and quality, but also whether they can provide ‘social value’. They might offer a worse product at a higher price, but if they can show that their solution is greener, or that they plan to employ more people (ideally, from underprivileged backgrounds), then they still might get the contract.

This highlights another issue with the ‘everything bagel’ strategy. The unintended consequence of this policy is that startups and SMEs are put at a distinct disadvantage. It isn’t enough to create jobs, cut emissions, or train apprentices, you need to prove it too. This might mean paying for expensive certification or hiring consultancies to track impact. In some cases, startups have been forced to report their impact using platforms that charge large fees. While this is not a problem for multinationals with dedicated ESG teams, it is a burden too far for many small firms.

And by weighting employment in particular, innovative solutions that use automation to reduce costs could end up at a disadvantage. Hypothetically, if a wind turbine manufacturer can build the same turbine using only half the labour of its competitor, should they be penalised?

It is important to remember that politics is a variable and not to compare the status quo to a theoretical ideal. In practice, any set of criteria will be determined in large part by what is politically convenient, not what will deliver the best outcomes. 

There’s a trade-off on employment too. The employment benefits of incorporating non-price factors into a CfD auction will be easy to see. Politicians will be able to visit the factories and hear from workers about the benefits. Yet, the jobs cut as a result of marginally higher energy prices due to the policy will be harder to detect. They will exist all the same.

Awarding CfDs on the basis of job creation and spending on training is far from a free lunch. Instead of tinkering with auction rules, a better approach would prioritise removing the excessive requirements that hamstring renewable developments to unlock more development. At the moment, it can take up to 13 years to build an offshore wind farm due to permitting, legal challenges, and delays in getting a grid connection. Not only does this delay the transition away from fossil fuels, it makes it more expensive as investors demand a higher return to compensate for the uncertainty.

If we want to create green jobs, I can think of worse places to start.