Analyst view: Mike Harrison

Analyst view Previous Budgets have not been kind to energy, but the oil price slump has moved the goal posts.

This is the chancellor’s eighth Budget but the memories of his last still linger, with support for onshore wind and solar being curtailed earlier than expected. Many have come to expect this from government over the past few years, so in some ways the precedent has been set, but it still doesn’t give much faith to a sector in need of support to deliver the government’s own policies. As Peter Atherton of Jefferies remarked at our seminar in November, investors deal in uncertainty all the time. However, there is “good” and “bad” uncertainty, and it seems this government is set on pursuing the latter.

We see four key areas of the sector that will become clearer, or where announcements made at this year’s Budget: UK oil and gas; infrastructure; nuclear; and tidal.

UK Oil and Gas

UK oil and gas revenues are at their lowest since records began. This industry is “on the brink”, suggested oil tycoon Algy Cluff, who pioneered exploration in the North Sea in the 1970s. This reality presents a number of challenges. First, the UK’s tax revenues from the North Sea have plummeted and the Office for Budget Responsibility predicts receipts of £130 million for 2015/16, compared with £11 billion four years ago. This will have an additional impact on exploration and supply chains on a scale not seen for decades.

This is a likely area of focus, where Osborne will continue to use fiscal means to steady the ship until prices rise, such as ditching the 20 per cent supplementary tax levied on oil firms.

National Infrastructure Commission

The Budget will be the first opportunity to see how effective, influential, and independent the NIC is following the publication of its energy report. The chancellor asked the NIC to report ahead of the Budget, so it will be interesting to see what Osborne’s response will be. NIC’s report concluded that UK energy infrastructure is in much need of replacing. I therefore am anticipating he will announce additional government support for interconnection and look to make changes to regulated costs for storage, which is said to be hampering development, ahead of an expected launch of a consultation on the UK’s energy storage network and capacity.

Nuclear

While Hinkley looks ever more precarious and unlikely, it is expected that the government will publish its feasibility study of small nuclear reactors in the UK alongside the Budget. This follows on from the chancellor’s innovation pledge alongside the Autumn Statement last year.

Tidal

The key renewable technology project lauded by the prime minister before the last election was Swansea Bay Tidal Lagoon. Since then, the project has been hampered by delays relating to the strike price negotiations with the government. In February, energy secretary Amber Rudd ordered a review of the scheme to begin in early spring and the outcomes presented later in the year. However, the chancellor may provide an update in his Budget as to the government’s position, given the developer responded by saying a decision needed to be made within a matter of weeks to have any chance of progressing and “the review will be for nothing”.

Overall, the chancellor has a pivotal role in delivering the government’s energy policy, and decisions will need to be made this year to ensure the UK has enough capacity beyond 2020. Mr Osborne – will you keep our lights on?

Mike Harrison, principal consultant, JBP Energy