Analysis: Budget 2016 – what it means

Chancellor George Osborne announced his eighth Budget yesterday amid stories of global – and Chinese – economic uncertainties. Despite this, the Conservative chancellor stuck steadfastly to his promise to eliminate the deficit – currently at £72.2 billion – and create a budget surplus of £10.4 billion by 2019/20.

The calculations behind closed Treasury doors resulted in a Budget which unveiled new taxes (the sugar tax grabbing the headlines), and support to businesses funding allocations and tax breaks.

The utilities will feel the impact (for better and for worse) of the new spending plans. Osborne unveiled corporation tax reforms, the abolishment of the carbon reduction commitment (CRC), further tax breaks for the oil and gas sector, significant cash support for renewables, and backing for small nuclear, energy storage and interconnectors.

The sector was not immune from cuts, with plans being set out to “streamline” Ofgem and the economic regulators, while departmental budgets across Whitehall will be slashed by £3.5 billion.

As with all Budgets, tax was central. The 2016 incarnation was no different and the chancellor outlined “fundamental reform” plans to “modernise” the corporation tax regime, with a focus on losses and debt.

Osborne detailed plans to restrict the amount of profit that can be offset by past losses to 50 per cent. The aim is to make the system more flexible whilst ensuring “companies making large profits pay tax on these”. It is expected that this will raise £395 million in 2017/18, climbing to £415 million in 2018/19, before falling down to £295 million and £255 million over the following two years.

This new approach to debt will apply to firms making profits over £5 million from 1 April 2017 – so the utilities fall firmly into that bracket.

Osborne’s reforms extend to loans and interest payments. From April 2017 interest deductibility from businesses’ tax bills will be restricted to 30 per cent, although “firms whose activities justify higher borrowing are protected”.

This will have much bigger impact on the Treasury’s coffers, with the measure generating £920 million of revenue in 2017/18, peaking at £1,165 million in 2018/19.

This change refers to UK EBITDA, although it remains unclear whether it is interest on UK held debt or the debt of the wider group. Analysts at Jefferies have highlighted that, for the publically listed utilities, this point will matter most for National Grid.

All of National Grid, SSE, United Utilities, Severn Trent, and Pennon see their new interest costs ration fall below the 30 per cent threshold, but Grid sees this jump from 19 per cent when the EBITDA incorporates the US arm of the business, to 28 per cent when it is excluded.

Things are different for the “highly leveraged” network companies, who could see their tax bill increase as a result.

The oil and gas sector has been given yet another Budget boost by Osborne. He set out plans to abolish Petroleum Revenue Tax and reduce Supplementary Charge from 20 per cent to 10 per cent.

This will cost the Treasury an estimated £265 million a year by 2017/18, but will come as good news to Centrica’s upstream businesses.

The chancellor was eager to stress the carbon reduction commitment (CRC) is “a commitment; not a tax” and it will be abolished in 2019.

The HMT cash shortfall is set to be made up by increases to the Climate Change Levy (CCL), a move which has angered some renewable groups, with Renewable Energy Association chief executive Nina Skorupska saying the move now taxes renewable generation, with the government “squeezing and blocking” further development. (See further reaction here).

However, it is not all additional costs and tax reforms for utilities. In Osborne’s red box was a £730 million budget via contract for difference auctions to “back renewable technologies” over this parliament, including for up to 4GW of offshore wind.

The first auction will offer £290 million of this support, with the money available for offshore wind initially capped at £105/MWh (in 2011-12 prices), before falling to £85/MWh for projects commissioning by 2026. Further details are set to be announced in the autumn.

The chancellor also gave the nuclear industry a boost, unveiling plans to publish a small modular reactor (SMR) roadmap later this year, the first stage of a competition which will generate a list of SMR developers, and for £30 million to be allocated to a SMR R&D programme to develop nuclear skills capacity.

In the wake of the National Infrastructure Commission’s report Smart Power, the government has allocated at least £50 million for innovation in energy storage, demand-side response and other smart technologies over the next five years. It also said it will support at least an additional 9GW of interconnection and that Ofgem will consult on opening up the £100 million Network Innovation Competition to better enable innovation by non-licensed companies from 2017.

Ofgem has also been earmarked for change within the budget, with its E-serve functions set to be split off from the main regulator, allowing it to focus on its “core functions”, whilst the Budget documents set out amendments to its statutory duties “to ensure that wherever appropriate it considers competition levers first”.

The aim of Budget 2016 has been to help simplify areas of the energy industry – such as abolishing the CRC, but also to ensure the sector pays “its fair share” of tax – something that the new corporate tax regime sets out to do.

The networks and other highly leveraged companies are set to feel the bite of the Budget, but with additional support and funding for renewables and low-carbon technologies “the chancellor didn’t conjure any rabbits from hats this time, but you could say he found a few hamsters at the bottom of teacups”, according to the Energy and Climate Intelligence Unit director Richard Black.