Budget 2017: new low-carbon levies halted

In the run-up to the budget, hopes were running high that the government had been won round to the argument for low-carbon energy. Perhaps most importantly, the clean growth strategy, recently published by the Department for Business, Energy and Industrial Strategy (BEIS) rejected the idea that there had to be a trade-off between being green and economic prosperity.

These hopes were buoyed before the budget, when the UK announced during the international climate change agreement talks in Bonn that it would be taking the lead on a worldwide initiative to curb unabated coal, setting Britain at loggerheads with Donald Trump’s US government.

But while climate change minister Claire Perry was taking the global stage, she was clearly finding it harder to get the message heard closer to home in the Treasury. And clean growth barely merited a mention in the budget.

The update of the Levy Control Framework (LCF) – which was published alongside the budget – states that there will be no new low-carbon levies until the cost of existing subsidies begins to fall. Existing commitments will be honoured, including the £557 million already allocated for further contracts for difference (CfD) auctions in the clean growth strategy and the strike price agreement for the Hinkley Point C.

Unlikely impact

“The good work that came out of the clean growth strategy seems to have fallen on deaf ears,” argues Jonathan Marshall, energy analyst at the Energy and Climate Intelligence Unit. “We’ve heard a softening from BEIS, but higher up the food chain they seem to be sticking to the old script.”

Aldersgate Group executive director Nick Molho agrees. “There is a real disconnect between where BEIS is trying to drive the agenda and the Treasury,” he says.

And Greenpeace policy director Doug Parr says it is “unclear” how the budget fits with decarbonisation plan in the clean growth strategy.

The likely impact of the announcement is illustrated in a table at the back of the paper, which gives the Treasury’s projections for low-carbon generation until 2025. This shows that total renewable large-scale generation capacity is expected to grow from 33.3GW in the current financial year to 41.7GW by 2024-25. And the vast majority of the increase is expected to come from continued growth in offshore wind capacity, which could nearly double from 7.49GW of installed capacity this year to 14GW in 2024-25.

Parr argues that this level of new renewable generation is insufficient to get the UK on the decarbonisation trajectory required to meet its statutory carbon emission reduction targets.

Investors can glean some succour from the decision, also announced in the budget, to maintain the carbon price until the last coal-fired stations are due to have been phased out, also in 2025. “You can bank on your forecast revenue models not changing until 2025,” says Marshall.

Subsidy free

However, beyond this date, investors are still in the dark. “This takes you to the mid-2020s but beyond that there is a lack of clarity,” says Molho. “We were expecting much more clarity about how low-carbon projects will be funded through to the 2020s and how the carbon price signal will evolve.”

The absence of the framework of regular auctions established by the LCF, will compound the lack of confidence among investors. Marshall says developers of projects which require subsidy will have one shot at securing it under the government’s framework. “There will be one auction and no route to market for, potentially, six years.”

Parr suspects that ministers may be banking on continued falls in offshore wind prices to get them off the hook. “They’re just hoping that renewables will be subsidy free, so they don’t need to give them any support,” says Parr who estimates that anticipated reductions in offshore wind costs could secure double the amount of such capacity through the CfD process.  “If it gets cheaper the amount you can get rises sharply,” he adds.

Over-reliance on offshore wind brings its own risks in terms of intermittency of supply, though. The lid on low-carbon subsidies limits the room for manoeuvre for those seeking to develop less-established technologies like wave and tidal, which could even out the peaks and troughs in supply from solar and wind.

Few clues

The Swansea Bay tidal lagoon is “very unlikely” to happen under the framework announced in the budget, reckons Marshall.

The lesson the government should be drawing from the fall in offshore wind prices is that upfront support can deliver supply chain savings down the line. “To decarbonise cost effectively and keep growing the supply chain, we need to be able to build on the cost reductions in offshore wind,” says Molho. “The budget doesn’t stop that but it’s not clear how it will help it either.”

And the budget announcement offers few clues for tackling the wider problem about how the UK will renew its rapidly aging power fleet. “The vast majority of UK power stations are getting pretty old,” says Marshall, pointing out that 10GW of nuclear capacity is due to be retired by 2025 on top of the 8GW of coal stations that will have to be phased out by then.

Added to that, the demands on the electrical generation system will only intensify thanks to increasing demand for electric vehicles and a further shift to electrified heating, argues Parr.

One source from the renewables industry warns that, with or without renewables, we will need to replace these old plants. “It’s difficult to see how that will all be plugged through gas: there is an element of storing up problems here.”

Industry reaction

Here is some of the reaction from the industry to the budget announcement:

Simon Virley, head of power and utilities, KPMG

“The budget confirms that a carbon price will remain in place into the 2020s and that no new Contracts for Difference will be issued before 2025, beyond the £557m already announced. But this leaves options open for what happens post-2025, which could include supporting further new nuclear projects, tidal projects, or zero-subsidy solar and wind.”

Lawrence Slade, chief executive, Energy UK

“Over half of generation now comes from low-carbon sources and the recent CfD auction showed how far the cost of offshore wind has fallen – thanks to providing the necessary certainty for investment which drives down the cost of decarbonisation, benefits customers and the wider economy. Postponing further support for renewables until 2025 denies the opportunity for other technologies and projects to follow suit and prevents taxpayers from reaping the benefits of the cost reductions their funding has made possible.”

Richard Goodfellow, head of energy and utilities markets, Addleshaw Goddard

“Following on from the clean growth strategy, we hoped that the Budget might set out some clear energy policy decisions, but it seems the government’s focus is elsewhere – Brexit. In the meantime, there is at least a bit more certainty around the Levy Control Framework and the Total Carbon Price; and confirmation that electric vehicles and the supporting infrastructure is a key priority for government.”

David Oliver, consultant, Inenco

“We welcome the move; low-carbon subsidies account for around 25 per cent of business energy bills, so clarity is essential for future forecasting – and we believe that tighter controls are necessary.

“The Levy Control Framework was created to provide support for low-carbon technology at the lowest cost to consumers, yet deals such as the Hinkley Point C nuclear contract have been agreed outside of the official framework, and will prove costly to consumers and businesses.”

Jonathan Marshall, energy analyst, Energy and Climate Intelligence Unit

“Despite warm words from the dispatch box, Philip Hammond has failed to deliver on low carbon energy. Keeping the carbon price floor unchanged was the bare minimum expected before the Budget, and does not make up for the hat-trick of freezing new low-carbon support, throwing North Sea oil and gas another lifeline, and shying away from fuel duty changes that would both encourage lower-carbon transport and tackle the air pollution crisis.”

James Court, head of policy and external affairs, Renewable Energy Association

“The chancellor talked about embracing the future in his speech, yet hid away the details that he was blocking all renewables to market. Onshore wind and solar are already cheaper than new build gas, and we have seen huge cost reductions happening in offshore wind, energy from waste and biomass. These are the technologies of the future and the government should be backing them, not blocking their progress. The renewable power and heat sectors are urgently calling for clarity around how the government intends to bring forward new capacity.”

Claire Mack, chief executive, Scottish Renewables

“The UK government’s budget is the first since the publication of its clean growth strategy, but the opportunity to deliver on the aims and ambitions of that document has not been taken. Long-term certainty over the direction of the UK’s energy system is vital if we are to unlock our renewable energy industry’s vast economic potential.”