A difficult balancing act

The move in the Budget to cap the carbon price support might ease the burden of rising energy bills, but some fear it could also deter investment in low-carbon technologies, says Mathew Beech.

In his Budget for “the makers, the doers and the savers”, chancellor George Osborne announced a cap on the carbon price support of £18/tonne of carbon dioxide (tCO2).
The announcement was well trailed ahead of the budget and represented something of a compromise between those manufacturers and consumers of energy calling for a freeze to the rate of increase of the carbon floor price (CFP) – or for it to be scaled back or scrapped – and those championing low-carbon technologies, who want the rate of increase to continue as planned.
As it is, from 2016/17 until the end of the decade, the UK carbon floor price will be no more than £18/tCO2 above the carbon price of the European Union Emissions Trading System (EU ETS).
The carbon price support – the difference between the EU ETS and the UK CFP – had been set to increase to more than £24/tCO2 by 2018.
This change is set to cost the government £340 million in 2016/17 in lost tax revenue, increasing up to an £870 million dent into the Treasury’s coffers by 2018/19.
As part of a £7 billion package for industry, the move will knock an average of £50,000 off the energy bill of a medium-sized manufacturer, £800,000 for a typical heavy industrial firm and £15 off the average domestic energy bill.
Those in favour of the freeze in the carbon tax include the manufacturers’ association EEF, the Energy Intensive Users Group (EIUG), the CBI and consumer watchdog Which? All of these say the move to cap the carbon support price at £18/tCO2 until the end of the decade addresses the concerns of consumers – domestic and non-domestic – over rising energy prices.
The EIUG has reservations about the cap being too little too late because “climate policies have already caused lasting damage” to Britain’s energy-intensive industries (EIIs), while the CBI warns that those other than the EIIs will still face high energy costs.
On the other side of the argument, as they had been before the Budget was delivered, are the renewable and green groups.
RenewableUK says capping the carbon price support “will chill the mood of some investors in clean energy projects”, while Doug Parr, chief scientist at Greenpeace, say the move is a “multimillion bung to coal plants”, which are predicted to see a fall in generation costs of up to £6/MWh.
Alongside the cap was an extension to the compensation package from the carbon floor price enjoyed by energy-intensive users, plus the inclusion of a compensation package for the additional costs from the Renewables Obligation. Both of these are also beneficial for EIIs.
Osborne also included an exemption from the CFP until 2019 for the fuel for combined heat and power (CHP) generation used to supply manufacturers. This is predicted to cost the government £290 million between 2015 and 2019.
Director of the Combined Heat and Power Association (CHPA), Tim Rotheray, says: “[The] Budget will help drive investment in industrial energy efficiency, delivering the rare combination of increased industrial competitiveness and lower carbon emissions.”
Jonathan Graham, policy manager at the CHPA, says the exemption will boost those industries with existing CHP facilities and help them to compete with their European rivals.
However, Graham urges the government to go further and publish a dedicated CHP policy, because “too often CHP has been a bolt-on to other policies”. He adds: “What a bespoke CHP policy will help to drive is that new investment in new CHP capacity.”
Carbon capture and storage (CCS) also received an unexpected boost, with the chancellor revealing that £60 million was being provided to support CCS technologies that show significant potential to reduce the cost of low-carbon generation in the UK.
Luke Warren, chief executive of the ­Carbon Capture and Storage Association, says the money had come earlier than expected and that the funds will assist the development of “some quite exciting second-generation technology”.
However, Warren raises concerns about the capping of the carbon tax. He told ­Utility Week: “We are not comfortable with these retrospective changes in policy; we need some stability with the carbon policy framework.”
Warren adds that he also has concerns about the impact this will have on the funds available for low-carbon generation via the Levy Control Framework.
He is not reassured by the comment in the Budget that “the buying power of the Levy Control Framework will be unaffected by other Budget decisions”.
Warren adds that this is an “area of big concern” and more details are needed on how this will be achieved.
A concern shared across large parts of the industry is that the cap to the carbon support price could potentially undermine the confidence of potential investors in low-carbon technologies.
Tony Ward, head of power and utilities at EY, says Osborne faced a “difficult balancing act” in trying to ensure businesses and consumers do not struggle with rapidly increasing energy bills, while also trying to provide funds for low-carbon innovation.
Ward adds that this appeared to be an “adjustment in mid-flight” and “investors who have committed to build assets or businesses off the back of the original policy instrument will be increasingly suspicious of any new UK government policy”.
Paul Massara, chief executive at Npower, says the cap on the carbon tax will “ease the burden” on UK businesses and households, but he echoes Ward’s words of caution.
He believes the move will “impact on the ability to find investors for the billions of pounds’ worth of energy infrastructure that Britain needs to build an energy future that is both secure and low carbon”.
The 2014 Budget is, as always, a compromise. The UK needs to continue with its transition to a low-carbon future to ensure it meets its 2020 and 2050 carbon emission reduction targets, but at the same time, businesses and households need relief from ever-increasing energy prices.
A cap to the carbon support price does – temporarily, at least – offer something to both sides. However, the results of Osborne’s “difficult balancing act” between low-carbon innovation and encouraging the economic recovery will only become apparent in the coming years.