Member Article

Budget 2017: big energy questions, but few answers

Chancellor Philip Hammond’s Budget speech failed to address the big energy questions facing UK business, said Michael Hill, Lead Analyst for Inprova Energy.

One of the few announcements was the government’s intentions to publish a formal discussion paper on maximising the exploitation of the North Sea’s remaining gas and oil reserves, but this wasn’t welcome news to the Green Party’s Caroline Lucas, who tweeted: “Tax Cuts for dirty energy – unbelievable!”.

Despite a lack of focus on energy related matters, a review of the supporting document released after the speech provides details on a number of issues:

Carbon Price Floor

The Carbon Price Floor is unclear, with the current price capped until 2021. Under a specific point relating to carbon prices, the Treasury stated “the government remains committed to carbon pricing to help decarbonise the power sector”, going on to say that “the government will target a total carbon price and set the specific tax rate at a later date”.

Further details will be provided regarding carbon prices for the 2020s at the Autumn Budget. However, with a November deadline for entry in this year’s T-4 Capacity Market auction, participants could find themselves with only a matter of days to consider the level of carbon pricing for the Winter 2022 period being auctioned.

Currently, the cost of carbon to UK generators includes the variable price of EU ETS allowances added on top of the price set by the government, and the term “total carbon price” may offer insight into the government’s intentions regarding the UK’s participation in the EU Emissions Trading Scheme. This term seems somewhat ambiguous, but suggests that the government may be considering a withdrawal from the EU ETS as part of its Brexit strategy. However, removing the variable element of the cost of carbon would go some way to giving businesses greater clarity on what they will have to pay.

Levy Control Framework (LCF)

One announcement that was expected was the future of the Levy Control Framework (LCF) past the end of the current budgetary envelope in 2021. However, the only detail that emerged was that the government would replace the LCF with a new set of controls, the details of which would be provided later in the year.

Industrial Strategy Challenge Fund (ISCF)

One welcome announcement was that of a new Industrial Strategy Challenge Fund (ISCF) that will “support collaborations between business and the UK’s science base”. An initial investment pot will be provided in 2017/18, with the first wave of challenges funded from the ISCF, including the development of cutting edge AI and robotics systems that can operate in extreme and hazardous environments such as off-shore and nuclear energy, and the development, design and manufacture of batteries to power the next generation of electric vehicles.

What this means for the future of energy is uncertain, however the government believes investment in these kinds of technologies has the potential to “transform the UK economy”.

In summary…

The failure to provide clarity in some areas is frustrating, as many industry stakeholders were keen to understand the cost environment for Levies and Carbon post-2021, with further delays to this likely to impact on investment decisions for upcoming CfD and Capacity Market auctions.

The lack of any mention of renewable energy is also a concern and raises questions about how committed the government is to decarbonisation, with the oil and gas industry once again getting support.

Green campaigners and low-carbon stakeholders will understandably look upon the Budget unfavourably. Once again it seems that the government is more keen to extend the life of the oil and gas industries, at the detriment of low-carbon technologies and could see consumers paying a premium for decarbonisation in a less competitive environment.

Further information: www.inprovaenergy.com

This was posted in Bdaily's Members' News section by Inprova Energy .