George Osborne's budget delivers key changes to the future energy and carbon landscape

On the 16th March, George Osborne delivered major reforms to the carbon tax sector and further reinforced the UK Government’s commitment to low carbon reform with a key announcement to enshrine a “net zero emissions” goal into law.

 

The UK Government budget has taken steps to not only simplify the carbon tax landscape but also provide policy signals. However, significant challenges still exist in controlling the Levy Control Framework (the fund for supporting the delivery of low carbon generation technologies) whilst ensuring the UK remains competitive based on the cost of energy and legislation.

Beond has considered the key statements from the budget and has outlined the key statements below.

 

1)    The Carbon Reduction Commitment (CRC) is to be abolished at the end of the current reporting phase (2018-2019).

Beond believes this offers a welcome relief to UK commerce and industry on what was an unpopular and time intensive tax. The scheme started as a revenue opportunity to organisations who excelled in meeting and exceeding their targets but slowly turned into an ineffective and overly complex tax which did not deliver or incentivise carbon reduction.

2)    The Climate Change Levy (CCL) will increase from April-2019.

This change to the cost incurred under the CCL is based on recovering lost revenues from the removal of the CRC. Whilst this is expected to be cost neutral for those consumers who no longer have to pay the CRC tax there is concern that the removal of the LEC allowance for renewable generators will mean higher tax costs for the low carbon generation sector which is likely to feed into higher premiums for purchasing renewable energy.

From April 2019 the CCL rate ratio will be rebalanced between power and gas meaning that those consumers who rely heavily on gas as a source of fuel will see disproportionally higher increases. The rebalance will shift the ratio to 2.5:1 from April 2019 and 1:1 from April 2025.

This change also captures every single consumer who currently pays CCL and in turn has a direct impact to those organisations who pay CCL on their bill but are not financial participants of the CRC. Initial projections for the rates in April 2019 are 0.847p/kWh for power and 0.339 for gas.

3)    Energy intensive consumers will see additional relief on the Climate Change Agreement (CCA) scheme – offset by the risk of a target review in 2016.

Existing participants of the CCA scheme will see the discounts they receive on the CCL tax increase to 93% for power and 78% for gas in April 2019. However, the Government has signalled that a rate review will take place in 2016 to consider further tightening of the targets set under the framework and alongside this the scheme itself will be reviewed to include any change from 2023. Beond believes this could further damage the success of the CCA scheme as organisations struggle to meet more stringent targets.

4)    £730m pledged for Contract for Difference (CfD) auctions to back renewable technologies, with a further cut to the supplementary tax for oil & gas producers (UK continental shelf and north-sea) from 20% to 10%, £20m allocated for seismic studies on exploration in 2016-17 and the removal of the 35% tax on production profits (equivalent to £1bn of tax breaks).

Given concerns over the long term viability of the Levy Control Framework budget it is good to see additional commitment to the low carbon generation sector with £730m likely to fund an additional 3.5GW of offshore wind. However, there is no mention of funding for onshore wind, solar or biomass and no further incentives for energy efficiency. Whilst oil and gas is seen as the polar opposite to the low-carbon future, the tax incentives for oil and gas producers is a welcome relief for UK production given the fall in the oil price.

The Government’s autumn statement is going to further expand on the funding options and pathway to clean-energy funding post 2020.

5)    £50m has been pledged for innovation in Demand Side Response (DSR) and energy storage with a further £30m pledged for research into small modular nuclear reactor technology and skills.

Whilst the large-scale failure of the investment opportunity in carbon capture and storage looms heavily over this statement, there is welcome relief that the UK is continuing to invest in energy demand management and storage technologies and the diversification of our generation capabilities. Time will tell if this money is not only sufficient but incentivises the sector to bring innovations to the grid. The Government has also committed to supporting a further 9GW of interconnectivity which will further diversify our energy mix.

6)    A further consultation has been announced for summer 2016 which will consider a single reporting framework with a view that implementation will occur in 2019.

Whilst there is an existing consultation on the simplification of the current UK tax and compliance sector, this is likely to continue the uncertainty over cost and compliance for UK consumers.

7)    There were no statements on the future of the Levy Control Framework (LcF), COP21 or a potential reversal of the recent decisions on Carbon Capture and Storage (CCS).

2016 has seen significant concern over the potential over-spend on the LCF as a consequence of lower wholesale prices (and in turn a larger gap to support levels) and a higher number of eligible installations. Whilst the overall view on the LCF funding is rather opaque we are likely to see significantly higher funding levels into 2020/21 and beyond which may cause concern for the overall mechanism for funding low-carbon generation.

We believe it would have been a positive step for the Government to reinforce their commitment to CCS to further improve the future energy mix, given the funding statements for small-scale nuclear and energy storage and demand response.

8)    “net zero emissions” will become a reality, enshrined into UK law.

Whilst not directly part of the Government budget, the recent announcement by Andrea Leadsom (Energy Minister), that the Government was committed to enshrining the net zero goal agreed in Paris into law has significant implications for the UK as we move into the 2100’s. In the short term the “net zero emissions” law will put the UK on a direct path to mandated reductions over and above those agreed under the COP framework.

Beond view and conclusions

Whilst the budget has delivered on some of the key areas which many in the industry wanted to see, there is still uncertainty on the overall reporting framework, with further announcements due in the forthcoming Autumn statement.

As part of our on-going commitment to our clients we believe in delivering key insights into not only the challenges faced by consumers but also the future expected risk. As part of our current future strategies for our clients we have delivered insights into future risk (energy wholesale, taxes and levies), and 2019/20 was identified as a transitional period in the UK market.

We believe we can further support our clients by:

  • Understanding and adapting the energy and carbon strategy to include the changes announced in the budget, anticipating not only the internal compliance but also the financial cost.
  • Considering the additional benefits or risks in the changing energy and carbon landscape and providing a clear path to success and mitigation.
  • Reviewing the cost of purchasing green energy (or considering alternatives such as on-site generation) given the increase in taxation levied on low-carbon generators under this budget.
  • Providing innovations in technology and continuing to pursue new technologies such as our current investment in solar and battery technology.

Beond Services

Beond are a privately owned specialist energy market consultancy – offering innovative and bespoke services to a wide range of energy and carbon consumers. Our business is built on offering tailored energy management and purchasing solutions, supported by our proprietary software and managed by our dedicated team of experts.

Our 5th generation eAuction software platform and bespoke consultancy service delivers significant results to our clients:

  • Averaging 7.67% spread on all tenders, with an average of 7 competing suppliers with 9 bids – our maximum participation in 2015 was 27 separate offers for 1 client.
  • Our market analysis and key insights into market risks and opportunities alongside our client partnership model helps to deliver significantly improved value over and above the traditional procurement consultancy approach.
  • A recent client study in 2015 identified a zero cost option to reduce specific non-commodity charges by 60% – netting off future increases in the regulatory cost increases to 2020.
  • Our UK based risk desk can advise on all energy and carbon related matters, offering a single risk management approach to the total energy & carbon exposure of your business.
  • Our innovative approach to ESOS delivered zero cost compliance to our clients with 700GWh of energy audited with 102GWh of energy efficiency opportunities identified and pursued.

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