Summer Budget : Energy has to wait

Just because the Chancellor is not talking about energy, doesn't mean he is ignoring it

From an energy policy point of view, what was so surprising about the Summer Budget was the lack of it. There had been a number of significant announcements trailed in the broadsheets but these largely failed to materialise. Either this subject is to be covered in the Comprehensive Spending Review (CSR) later in the year, or the topic was just too unimportant for the Chancellor.

The Sunday Telegraph and FT both covered stories on the Carbon Price Floor (CPF). However in the Red Book, there was nothing. It seems strange that this was briefed to the media but omitted in the actual Budget. Was it an overzealous HMT source? A realisation that this could hinder the coal-to-gas switch over? Or maybe a Chancellor unexpectedly keen not to upset the apple cart ahead of Paris COP 2015? The answer may remain a bit of the mystery but the trailing in the media means that CPF is not necessarily out of woods just yet.

What did survive the transfer from the broadsheets to the Red Book is reform of the Climate Change Levy (CCL). The Government will remove the cost of renewables from CCL from 1 August 2015 and will consult over the transitional period. The Government will also not extend the Coalition government’s commitment to increasing the proportion of revenue from environmental taxes to this Parliament.

There was also talk of the Levy Control Framework and how the Chancellor will examine budget “overspend”.  It is likely that this is being reviewed under the Comprehensive Spending Review (CSR) and therefore should not be pre-empted. The energy industry will have to await the Autumn Statement in December (see below for further analysis). The DECC budget also awaits the same fate but the signs are looking ominous. Green Alliance analysis suggests that other ring-fenced Government departments and internal DECC legacy budgets means the departmental spending on energy could have on average just £700 million in annual budget.

There were a few measures on consumer energy bills but these will do little to trump the CMA headline grabbing announcement earlier this week. The Government are proposing to save £390 million over ten years by extending competitive tendering to onshore electricity transmission assets. The proposal make it easy for consumers to switch energy suppliers within 24 hours – a notable policy from the Liberal Democrats’ time at DECC.

It would not be the Budget without at least one reference to oil and gas. The Government will expand North Sea investment and cluster area allowances to include additional activities which will maximise economic recovery, but little further detail was added. However, the most interesting figures come from the Office of Budget Responsibility (OBR) Report. Oil and gas revenues were £0.5 billion lower than our March forecast in 2014-15 and they are expected to fall by around 70%. This is just under £11 billion less than four years earlier. In all future predictions the OBR predict that oil and gas production will decline and that UK oil and gas receipts from 2015 to 2021 remain at zero.

Although in this Budget there was little room for energy policy, this is not to say that there is not a storm coming. What is now apparent is that key decisions will come in the Autumn Statement, and from the media briefings energy is firmly in the Chancellor’s sights.

Further analysis: Levy Control Framework Review

Although there was no announcement on Levy Control Framework review today the way it was reported in both the FT and Sunday Telegraph suggests more to come, with language about “adding pressure on household bills” and “£1.5 billion overspend”. Although this does not tell the full story this could be viewed as a warning shot. The Treasury will welcome the CMA conclusion that “much of the recent increases are down to increased environmental and related network investment costs” and the OBR (pg.105) predicts that environmental levies will more than double by 2020-21, due to a rise in electricity generation from renewable sources. The Chancellor will use this to underpin either current or future arguments on cutting subsidy. The above mentioned articles could be the embryonic stages of the Government crafting a narrative to justify cutting subsidies for renewables in order to keep consumer energy bills down. The Chancellor knows it is very difficult to argue in favour of something that adds to household expenditure.

So what can the Government do to bring the LCF budget back into line? It would be very challenging for the Government to change contracts that have already been signed or retrospectively modify strike prices. This would set the Government on course for a number of legal cases, halt renewable investment and make meeting renewable targets all but impossible. It could be argued that much of this has already happened.

The easier option for the Government is to focus on what it can change in the future. In light of falling wholesale prices, the Government may revise strike prices and wholesale reference prices. It may also look to change the parameters and qualifying technologies for the future CFDs. However, the Government has to be careful it is not accused of ‘picking winners’ as this would go against the grain of Conservative ideology and could contravene EU state aid rules.

The promise to review the LCF beyond 2020 can be seen an as an olive branch to the industry and offer the prospect of investor confidence, which has been severely dented of late. Looking to extend the LCF into the 2020s was a recent recommendation by the Committee on Climate Change and therefore there is strong and influential voice already making the case. It is paramount that during this review process the renewable industry puts forward a compelling economic case, promoting job creation and setting out a vision to increase productivity and grow the UK economy. 

 

 

 

 

 

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