- Levy Control Framework will not be continuing post 2021. A new scheme to support renewables will be announced later in the year
- Government are going to introduce legislation to protect consumers in the energy market
- Carbon pricing to continue at the moment. However, the Government will assess setting a UK carbon price post Brexit
- Government to publish discussion paper on late-life oil and gas assets
- Skills and technical education remain high on the agenda
The Government had been trailing this Budget as Budget-lite. The heavy hitting stuff will come at the main event – the Autumn Budget. For energy this is particularly true.
The rationale for this is understandable. Major announcements related to energy and infrastructure were either made back in November in the Autumn Statement, or are still in the process of being formed as part of the Industrial Strategy or Emission Reduction Plan. So it is now with baited breath that we wait for Emission Reduction Plan.
Renewable investment and Levy Control Framework
Many within the renewable sector were hoping that this Budget would provide further clarity on Levy Control Framework (LCF) and investment in renewables. Unfortunately it looks like they may have received the clarity they did not want.
The Government has indicated that the LCF will be “replaced by a new set of controls” and “these will be set out later in the year”. From this we can glean that Government will not be continuing with the LCF in its current form post 2021. The Government are justifying this because of the “need to limit costs to businesses and households”. The Office of Budget Responsibility (OBR) is predicting a 0.2 per cent of GDP rise in receipts from environmental levies. It claims the biggest effect is from levies within the LCF because of “rising renewable electricity generation”.
It is likely that this will reignite fears in certain sections of the green lobby that the Government will be taking an axe to renewable subsidies. These fears are being exacerbated as the Government looks for funding to support declining public services (such as social care or NHS) or rising inflation, and green levies become an obvious target.
However, it is important to remember that the Government has not made any retrospective changes to the £730m made available for CfDs, although we may have to wait for the Emissions Reduction Plan on whether this will be spent in 2 or 3 auctions. The Government is unlikely to make any retrospective change to LCF because it would go against the narrative of industrial strategy and encouraging business.
What the Government are giving is a clear signal that if the renewables sector want continued support additional strain on energy bills needs to be minimised.
Luckily for renewables, the change of Government also brought about a change in the economic mind-set. Fiscal targets and reducing the deficit were scrapped and replaced with a potential willingness to invest, as long it can help Britain thrive post-Brexit. The idea of Green Bonds or innovative public-private finance (PF2) mechanisms could provide a new way to finance renewable projects going forward.
The Government may also want to stop auctions for renewables because they are thinking more long term about how the electricity market works. Subsides have been necessary to help get renewables developed in the market. However, the market is still inherently designed for fossil fuels, which rely on using a fuel – which can be priced – to underpin the market. Renewables on the other hand do not have to pay for their fuel once the hardware is built. As renewables grow in the energy mix there may have to be a shift in how Power Purchase Agreements are decided. The old way of levies on energy bills may not continue in its current form. Renewables are going to have to think about the future and potentially about the next round of electricity market reform.
Consumer Green Paper
Although more detail is yet to be provided, the Government may be about to intervene in the energy market. The Government announced that it will be publishing a competition and consumer ‘green paper’. It will help consumers “where markets fail and competition isn’t strong”. This may sound familiar? Well it is. When Theresa May has been questioned about the energy market during PMQs, her responses have never really deviated far from – “where we think markets are not working, we will look at any measures that are needed—and the energy market is one of those we are looking at the moment” (PMQs February 2017).
The Government’s willingness to introduce new legislation to intervene in energy market has been sparked by recent energy price hikes. But don’t expect the same fanfare as at the launch of the CMA investigation under David Cameron, the reason being that (re)politicising energy bills could result in blowback since it was one of the only times that Labour wrong footed the Government. With Labour struggling to find policies that resonate, why put oxygen into a struggling fire?
One policy that continually comes under attack at every Budget or Autumn Statement is the carbon price floor. For energy intensive industries it is seen as tax burden that stifles their growth. For Eurosceptic backbenchers its links to EU Emissions Trading Scheme is enough of a reason to have it scrapped. But the Government has decided to continue with it – albeit at a frozen level – and make no further changes. One factor may be that coal – the highest carbon pollutant – provided only 3.6% of electricity generation in Q3 2016. With coal now effectively dead it could argued that Carbon Price Floor is a bit of red herring.
Nonetheless, the carbon price is determined by the EU Emissions Trading Scheme. Brexit has meant that the UK has to start thinking about how it sets its own carbon tax. This is why the Budget documents also state:
“Starting in 2021-22, the government will target a total carbon price and set the specific tax rate at a later date, giving businesses greater clarity on the total price they will pay. Further details on carbon prices for the 2020s will be set out at Autumn Budget 2017.”
This hints that the Government is more than willing to leave the EU ETS as part of Brexit. Using the promise of joining other global carbon markets as a way to woo would future trade partners. It is not inconceivable that the UK could rejoin the EU ETS because it is mutually beneficial, but don’t count on it. EU renewable targets and the EU ETS are the type policies that Eurosceptic MPs will enjoy scrapping.
So in the coming months don’t be surprised if you start to see research and reports on how carbon tax or pricing in the coming months as carbon tax policy may be up for debate in the Great Repeal Bill.
Oil and Gas
The only energy announcement trailed in the press was the announcement that the Government will be examining tax for late-life oil and gas assets. The Government will be publishing a formal discussion paper to on the case for allowing transfers of tax history between buyers and sellers. Ministers will also establish a new advisory panel of industry experts to ensure appropriate scrutiny of the options. The review will report at Autumn Budget 2017.
Within the OBR figures there may be welcome news on the oil and gas industry. The OBR has upped its oil production forecast and is expecting to see the oil and gas sector to provide money for the Exchequer through (small) positive tax receipts. However with a potential indyref2 on the horizon, don’t expect a fanfare from the Government.
Skills and Education
One of the threads that runs through this entire Government is the importance of education, skills, STEM and technical education. It was an important key message in today’s Budget and is at the heart of the Industrial Strategy.
The Government wants to improve the pathway from technical education to securing skilled jobs. This focus on technical education is highly relevant to sectors such as energy.
This is why the Government is introducing – T Levels – which provides a clear qualification for technical education. This will be designed and recognised by employers. This will focus on just 15 clear career-focused routes. This is in line with the Industrial Strategy’s proposal for “15 core technical routes” which will be defined through labour market analysis.
Other technical education measures also include training time to increase by 50% and technical students to have access to student loans, like university students.
Informing the policy area around technical education, it will be important to incorporate this into responses to the Industrial Strategy green paper.
By Douglas Mcilroy