Happy days for old nuclear

It's a gloomy outlook for many as chancellor George Osborne gears up to announce more cuts in his third Budget speech on 20 March. However, Megan Darby spots some rays of sunshine for utilities

Companies with lots of nuclear and wind in their generation mix will have something to smile about on 20 March, if the government sticks to its plans. Their profits will get a boost from the carbon price floor, which kicks in next month. The bigger this carbon tax, the more competitive they look against fossil fuel generators. It starts at £4.94/tonne of carbon dioxide emitted and rises to £9.55/tonne in 2014. Chancellor George Osborne is expected to announce in his Budget statement that the rate will nearly double again the following year.

The government has been consistent on the level it will set the carbon price floor. What has changed is the price of carbon under the EU Emissions Trading System (EU ETS), which has slumped lower than anyone anticipated. The tax is the difference between the two.

Push up prices

Less happy about the hike will be the carbon-emitting fossil fuel generators and ultimately, though they may not know it yet, consumers. The carbon tax will push up power prices and feed through to energy bills. Heavy industry will be exempted from the costs, pushing extra onto small business and domestic users. IHS CERA analyst Catherine Airlie estimates in its third year, the tax could account for 10-15 per cent of the wholesale cost of electricity, which makes up about half of the average household bill. “Once its effects are felt there may be a public backlash and the government may have little choice than to make drastic changes,” she says. However, there is no sign of the government changing course yet.

Apart from anything else, the Treasury needs the cash. Osborne has little room for manoeuvre as he attempts to stimulate growth while sticking to “Plan A” for deficit reduction. Business secretary Vince Cable has been arguing for increased borrowing to fund capital investment. It would be an astonishing U-turn if Osborne were to agree.

Private finance plans

Assuming there is no direct government funding available for infrastructure projects, Osborne will be keen to talk up plans to mobilise private finance. There may be an update on the £40 billion government infrastructure guarantee programme, announced last summer to boost investment by underwriting key projects. Drax is set to become the first beneficiary for the conversion of half its coal-fired generators to run on biomass. A number of other utility projects are possible candidates for such support, notably EDF’s proposed new nuclear plant at Hinkley Point.

Osborne is also expected to find room in the budget to confirm tax breaks for shale gas exploration.

Tax avoidance campaign

Government’s campaign against tax avoidance continues, and Osborne is likely to announce measures to close loopholes. While utilities are not considered the most aggressive of tax planners (indeed, Centrica makes a virtue of its considerable tax contribution), they could be affected by any tightening of the rules. Water companies have been accused of cutting their taxable profits by routing loans through the Channel Island stock exchange, for example.

Francesca Lagerberg, consultant at Grant Thornton, says: “There has been plenty of pre-Budget talk that the government wants to turn the screw on larger corporates to cut down on offshore tax planning, but the danger here is that by acting unilaterally the UK may lose its competitive edge. International co-operation is a far stronger option and expect to see more news about how that might happen.”

This article first appeared in Utility Week’s print edition of 15th March 2013.

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