The Government has pledged in recent years to deal with high energy bills, and in this autumn’s Budget they have found one way of preventing costs from rising, at least on paper: they have simply not included anticipated plans for the successor to the support framework for low carbon generation. Despite expectations the Treasury would announce a replacement for the Contracts for Difference mechanism used to support the roll-out of nuclear and renewable technologies, the Red Book instead says that there will be no new low carbon electricity levies until 2025. With policy costs associated with low carbon levies expected to reach £9bn by 2025, the Government was evidently not keen to expand that any further.
This means that, while existing commitments will be honoured and the remaining money in the Levy Control Framework pot will continue to be available, there will be a hiatus between 2021 and 2025 in which no support will be available. Despite the CFD having helped to create the long term certainty that has driven costs for low carbon technologies, such as offshore wind down to record low levels, this now all risks being left in limbo until the Government can find a way of delivering that certainty without breaking the budget. There have been numerous suggestions that the cap for the LCF will be broken again this year despite efforts by BEIS to keep costs down.
Moreover, costs have been falling fairly rapidly for many renewables, and it would be interesting to see how the Treasury’s internal projections for energy costs fall if there is no support. A school of thought exists that suggests – since we are moving toward more low carbon generation – the CFD has kept prices lower than they otherwise would have been because no generation is currently being built that would produce power at current wholesale prices, since we continue to sweat assets. This therefore leaves open the possibility that, instead of reducing energy bills, it actually helps to keep them higher in the long run. All eyes will now turn to the much anticipated Industrial Strategy White Paper due next week to see if further detail will come from that.
The Budget also left the Carbon Price Support at the level already set – frozen at £18/tonne until 2021. The tax, which had been rumoured for abolition in a Budget a few years back, remains set at the 2015 level for the foreseeable future. With coal leaving the system, the Government may have taken the view that it is best to let sleeping dogs lie, since any increase would’ve required a commensurate increase in the support given to Energy Intensive Industries. However, many believe that if we are to rid ourselves of coal entirely by the mid-2020s, a price closer to £40 will be required in 2025. This means that the Government will have to make a steep climb in the years ahead to ensure it reaches the right level to support our decarbonisation targets to 2030 and beyond.
Good news for the North Sea oil and gas industry who will see the creation of transferable tax credits. The changes will allow tax credits be rolled over to the new owner of oil fields, allowing them to reclaim decommissioning costs. The Scottish Tories have already leapt on this as a boon for the Scottish Government – noting that £2bn extra will now be available to Ministers in Holyrood.  While there is clearly a political subtext here, Treasury officials hope that it will throw a new lifeline to the industry struggling with low prices, and unleash an estimated £40bn in new investment.

Authored by Michael Stott