On the 22nd November 2017, the UK Government delivered its Autumn Budget 2017. After much debate as to the success of the Clean Growth Strategy (CGS) launched in October 2017, it was anticipated that the Chancellor would use the Autumn Budget to set out further plans to ensure the UK remains focused on its trajectory to meeting the emissions reduction commitments (57%) to 2032.
The Clean Growth Strategy was initially delayed due to the EU referendum and June’s general election. It was initially expected to be a “carbon plan”. But, towards the end of 2016 we saw a shift in focus to being an “emissions reduction plan”, and upon its eventual release in October 2017 it had evolved into a “strategy” to guide the path to decarbonisation.
However, even by the standards of recent Budgets, there was little contained to give confidence to the energy sector that the UK had the certainty to deliver the ambitious goals of the CGS.
There are positive signs from the Budget that consumers will be protected from increased non-energy costs as we move into the early to mid-2020’s – an indicator that the continued financial pressure on energy consumers may start to ease.
1) A decision on a Total Carbon Tax
The issue over carbon pricing has seen much debate since its introduction, in part due to the cost not being of a significant enough level in order to remove the reliance on traditional thermal plant (namely coal) and to incentivise and bring into line the cost of low-carbon generation technologies.
A decision on the Carbon Price Support (CPS) post 2020-21 has been pushed back several times, since the current level of the CPS through to 2020-21 was set in the 2016 Autumn Statement. Earlier in 2017, the UK Government stated that from 2021-22 there would be a target to deliver a “Total Carbon Price” which would give businesses greater clarity on the total price they will pay. In recent weeks we have seen major UK generators lobbying (Drax) for the tax to be increased to further support the investment in new low-carbon power generation.
In this Autumn Budget 2017, the Government has confirmed that they are “confident” that the Total Carbon Price (EU-ETS & CPS) is set at the right level to ensure adequate investment. However, they have stated that they will continue to target a similar price until “unabated coal is no longer in use”- most likely to be between 2023 and 2025.
However, it is anticipated that if the UK Government decides to maintain the current carbon price into the 2020’s this risks a substantial increase in coal generation due to the recent easing of restrictions on coal production in China and the reduction in the current global glut of LNG as we move into the 2020’s – perhaps coal hasn’t quite had its day?
The current £24.50/tnne price level is however likely to continue pressure on the coal generation sector, but is unlikely to create enough shift from gas-fired generation to low-carbon sources.
2) Funding for the electric vehicle (EV) sector
The Chancellor announced a £400 million fund for EV charging infrastructure projects across the UK. In addition to this commitment a further £100 million has been pledged to help people buy EVs (plug-in-Car Grant) and a further £40 million will go towards charging research and development.
Recently the EV sector has been widely lauded as the future as we move towards driverless vehicles. Additional announcements on the taxation of diesel vehicles (in terms of car-tax (Vehicle Excise Duty) increases & company car tax increase (up 1% for fleet vehicles) is further moving the UK towards a decarbonised vehicle sector (not including the carbon cost associated with charging from the UK grid).
The UK Government has also committed to electrifying 25% of cars in central government department fleets by 2022 and for those people who charge electric vehicles at their place of work – a decision has been made from next year to not levy a benefit-in-kind charge associated with the charging benefits.
However, it is important to remember that in last year’s Conservative Party election manifesto there was a promise to spend £600 million by 2020 to ensure that every car and van in the UK will be zero-emission by 2050. This promise was merely the same funding promised at the election in 2015 – and as such with no new funding on offer there is no material increase in funding being offered.
3) The proposed tax-relief on late-life oil and gas infrastructure
From November 2018, the North Sea oil and gas industry will receive tax breaks in a bid to increase investment in natural resource development.
Chancellor Philip Hammond announced that a transferable tax history (TTH) for oil and gas companies will be introduced in the 2018/19 Finance Bill. The tax breaks will be offered for old oil and gas fields sold to new owners who are nervous over buying the assets due to the high decommissioning costs.
Under the new proposed rules, current North Sea oil and gas asset owners will be able to transfer some of their corporation tax history onto new buyers so they can receive tax breaks on decommissioning costs. The Chancellor hopes this policy will encourage new entrants to bring fresh investment to an area which still holds circa 20 billion barrels of oil.
4) Control on existing and new low-carbon spending and support
With the Government already admitting that it is falling short of its legally binding carbon targets to 2032, it was anticipated that further information would be given on the future of low-carbon support in this Budget.
An announcement was made that “there will be no new low-carbon electricity levies until 2025”, beyond the money already committed. This existing money includes up to £557 million already set aside to support technologies – mainly offshore wind – through the Contracts for Difference scheme in the early 2020’s. This also includes the cost of Hinkley C.
This means that new nuclear schemes beyond Hinkley C and the Swansea Bay tidal lagoon, and onshore wind and solar PV projects, will all likely be on hold unless they can find a way to proceed without government support.
In the Spring Budget 2017 there was an announcement that the Levy Control Framework (LCF – which sets annual spending caps on the main environmental levies) would be scrapped. However, there was a significant lack of clarity on the LCF’s future beyond 2020/21.
While the announcement of no new low-carbon levies alongside the continued commitment to existing spend is good news for energy consumers, the lack of clarity on the future beyond 2021 is likely to create nervousness from investors unless low-carbon technologies can compete in an unsupported market.
The Government has left the door open to revisiting new low-carbon electricity levies where there is a sustained and significant fall in the existing cost of levies to consumers or where a new levy is considered to have a net reduction effect on bills for consumers. The door is also open to the creation of subsidy-free CfD’s (Contracts for Difference) which could be offered below market rates.
The Treasury also confirmed that the Feed-in-Tariff (FiT) scheme will close to new entrants in April 2019 given the strong performance of current eligible technology in competing at market rates.
On balance, the Chancellor provided a greener Budget than expected but this materially fails to complement the Clean Growth Plan and support a strong, concise and clear vision for the future.
The Government is assuming coal prices remain stable and that there continues to be huge efficiency gains in the renewable technology and generation industry. If either of these assumptions fail to materialise we could find ourselves needing to revisit the entire plan.
For consumers we see the freezing of new low-carbon levies as a positive sign into the 2020’s as it will help reduce the burden of increasing regulated costs into electricity bills. However, this assumes that continued innovation and efficiency of the low-carbon generation sector will continue to keep the wholesale markets stabilised from the perspective of supply & demand.
Beond Group remains committed to continuing to analyse Government policy and work with our clients to understand not only their immediate strategy but also plan for the future.