Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

Gov’t uses Budget to control renewables impact

On 22 November, Chancellor Phillip Hammond delivered the government’s 2017 Autumn Budget. Although relatively light on energy announcements, the Budget still revealed several key changes.

Major policy shifts included the implementation of a control on new-carbon spending and the maintenance of a Total Carbon Tax at current levels.

The Budget also revealed new funding for electric vehicle charging infrastructure and recommended changes to the tax system for late-life North Sea oil and gas assets.

Several previous Budgets and Autumn Statements had promised a new set of cost controls for low-carbon spending post-2021, when the Levy Control Framework (LCF) expires.

Government instead delivered an effective moratorium on new low-carbon spending, with the Budget announcing there will be “no new low carbon electricity levies until 2025”.

In its Control for Low Carbon Levies paper, released alongside the Budget, government confirmed that until the sum of existing costs falls in real terms, the Control will not allow for new low-carbon levies to be introduced. These costs are currently composed of the Contracts for Difference (CfDs), Feed-in-Tariffs and the Renewables Obligation schemes. However the committed £557mn for further auctions under the CfD, and support for the new Hinkley Point C nuclear plant, have been previously confirmed and are included within the cap.

Based on government’s current forecasts this suspension will be in place until 2025. The forecast levy spending indicates a slight fall in total levies in 2024-25, from £8.7 to £8.6bn.
The report proposes two exceptions where new low carbon electricity levies may be considered. These include if the aggregate of existing levies is forecast to have a sustained and significant fall in real terms and secondly if the project has a net reduction effect on bills, consistent with the governments energy strategy.

Single carbon tax

The Budget also revealed the government is “confident” that the Total Carbon Price made up of the EU’s Emissions Trading System and UK Carbon Price Support, is currently set at the right level.

The carbon price is currently £24 per tonne of CO2, made up of £18/tCO2 from the UK carbon price floor and approximately £6/tCO2 from the EU Emissions Trading System. The government will continue to target a similar carbon price until unabated coal is off the electricity system (planned for 2025). Its intention is to deliver a stable carbon price while limiting costs on business.
However, the budget fails to provide clarity on whether the floor price will be extended to 2025 or how the government will hold this carbon price steady. In addition, the Budget provides no extra details on the future of carbon pricing after the 2025 coal phaseout.

EV infrastructure gets boost

The Budget also pledged to invest £200mn, to be matched by private investment, into a new £400mn Charging Investment Infrastructure Fund. This fund will be committed to the wide rollout of charging infrastructure, with the additional commitment to electrify 25% of cars in central government fleets by 2022. In addition, the government will also provide £100mn to guarantee continuation of the Plug-In Car Grant to 2020 to help consumers with the cost of purchasing a new battery electric vehicle.

New entrants for North Sea?

The Budget confirmed that, from November 2018, government will introduce “Transferable Tax History” to assist the transfer of assets between buyers and sellers. Draft legislation will be published in spring 2018 and the government will aim to legislate to allow for the transfer of tax histories from 1 November 2018. This is intended to encourage new entrants to bring forward fresh investment. The government will also launch a technical consultation on allowing for a petroleum revenue tax deduction for decommissioning costs incurred by a previous licence holder, hoping to support transfers of assets where the seller retains the decommissioning liability.

Industry regrets missed opportunity

The Budget was met with a wide range of reaction, with most commentators expressing disappointment at the apparent curtailing of renewables ambition.

Energy UK Chief Executive Lawrence Slade commented: “Over half of generation now comes from low carbon sources and the recent CfD auction showed how far the cost of offshore wind has fallen – thanks to providing the necessary certainty for investment which drives down the cost of decarbonisation, benefits customers and the wider economy.”

James Court, Head of Policy and External Affairs at the Renewable Energy Association said: “Whilst the announcements for electric vehicles are positive, the UK government seem to be turning their back on renewables by announcing no new support for projects post 2020 and a freeze on carbon taxes […] it’s hugely disappointing.”

However, Dorothy Thompson, Drax Group CEO was more positive, saying: “Having this clarity from the Chancellor on the Carbon Price Floor will help to unlock further investment in low-carbon and renewable technologies, […] At Drax, we will now continue to explore new ways of converting our remaining coal generating units to biomass and gas, and build new rapid response gas plants.”

Cost control

Looking into the future, the Budget correlates well with the main message for energy from the Industrial Strategy – that the priority is to control energy bills. The Industrial Strategy even hinted at moves to exempt a broader range of businesses from the costs of low-carbon policy to “address potential intra-sectoral competitive distortions”.

However commentators have said the new low-carbon cost control raises the risk of failing to meet legally binding set carbon targets.

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