Energy's bitesize budget

Fossil Fuels

With the falling international oil price the oil and gas industry has been struggling. This has led to weeks of very vocal external and internal lobbying for a tax break. So has the Chancellor answered their calls? As has been the case over the past few years – a little.

The industry will have welcomed Supplementary Charge being reduced from 20% to 10% from 1st January 2016. However, the reduction in the Petroleum Revenue Tax (PRT) from 35% to 0% is a bit of a red herring. PRT is only paid on profits from oil and gas production and therefore abolishing it sounds impressive. However, the OBR figures predict zero revenue from oil and gas production in the forecasting for the next three years, so the Government is reducing a tax that they predict will make no money for Exchequer.  In any event, he’s retaining the tax in case the industry starts to make money again so he’d quickly be able to reverse today’s move.

Another small token of support is the Government providing another £20 million for a second round of seismic surveys in 2016-17. There was no headline tax break when it came to decommissioning but the Government do state that if industry and the OGA can deliver significant savings in decommissioning, the Government will explore whether decommissioning tax relief can encourage “transfers of late-life assets”.

So overall the Government has only given the oil and gas headline rate of tax - which some industry figures claim is around 50% - a trim rather than a significant cut. The reluctance to go further indicates recognition from the Government that tax breaks have yielded no uptick in E&P activity and so no money for Exchequer. Treausry civil servants will be asking how much more they can give, especially when trying to predict the unpredictable with global oil prices. The hope will be that the promise of no tax on any fossil fuels is enough of an incentive for financiers to invest in E&P activity.

The Chancellor has in previous years championed shale gas though in this Budget it has been confined to the pages of the Red Book.  The Government will be consulting on Shale Wealth Fund later this year, which the Government claim “could be worth up to £1 billion over 25 years”.  Having provided so much support in recent years, the Government’s view is that it is now for industry to prove that it can make shale gas work.

Low carbon

Renewables have had a tough time with the Government of late, with critics warning of a hit to investor confidence.  The Government is progressively seeking to remove Government from the market in many ways, but industry has been clamouring for post-2020 clarity on the future of the Levy Control Framework. The Chancellor noted in his speech that £730 million will be allocated for the three Contracts for Auctions that will take place this Parliament. 

The Government hopes that this £730 million will deliver 4GWs of offshore wind and other less established technologies. A first pot of £290 million has been allocated for the first auction in Q4 2016, though this much lower amount than previous rounds suggests the Government still needs to decide its thinking about future low carbon support post 2020. Going through the OBR report the £730 million for CFDs is what remains of the initial budget but savings have been made through cutting the CCS competition and miscalculations.

The focus on offshore wind is a healthy indication that the Government will continue to support this industry above other renewables. However the Government is also staying true to its promise to focus on reducing costs. The Government looks to be proposing a new strike price of £105/MWh for the 2016 CFD auction, falling to £85/MWh for projects commissioning by 2026. This is a reduction of £9 MW/h and £29 MW/h respectively, from the clearing price at the last auction.

What is less clear from today’s announcement is what “other less established” technologies will be taking part in future CFD auctions. There is no indication whether Swansea Tidal Lagoon or CCS will be taking part in the same auction, given their expense and distance from being technically plausible. What is clear and unsurprising is the lack of mention on “established technologies” (solar and onshore wind) which are now fully excluded from government support.

Further details on the LCF and CFD are due to be announced “in the autumn” but more detail will come to light with the subsequent consultations that will follow shortly. Although the Budget does provide clarity that CFDs will continue and receive additional funding, renewable investors and companies will quickly start to work out how much can be delivered with a pot of £730 million.

Other key announcements in the low carbon sector include the Government accepting and planning to implement all the recommendations of the National Infrastructure Commissions report – Smarter Energy. The report recommended greater interconnection, demand flexibility and support for energy storage. Today the Government has pledged at least £50 million for innovation in energy storage, demand-side response and other smart technologies and also supports at least 9GW of additional interconnection.

Carbon Taxation

There were some relatively significant changes to carbon taxation for business. The Chancellor proudly announced that he will scrap the Carbon Reduction Commitment (CRC) energy efficiency scheme. This is will be welcome in some corners as the CRC has been described as a red-tape burden on FTSE 100 companies, rather than effective way to reduce carbon. However to counteract this, the main rates of the Climate Change Levy will be increased. This applies to businesses in the industrial, commercial, agricultural and public services.  It also means higher taxes on renewable generators.

The Carbon Price Floor which is often a target for energy intensive users, will remain in place and at the same level it was frozen at in 2014. The cap will stay in place with the price only going up with inflation until 2020-21. The Government set out the long-term direction for CPS rates and the Carbon Price Floor in the Autumn Statement, taking into account the full range of factors affecting the energy market. This will be welcome by energy intensive users but they will have to wait until the Autumn Statement on further clarification on the Carbon Price Floor and compensation for other climate change measures.

Douglas McIlroy

Hill & Knowlton Strategies Search