The last Budget before Brexit contained little for utilities

A crowd-pleasing Budget from chancellor Philip Hammond may have helped the Conservatives with the public at large, but there was little for utilities to celebrate.

It was the longest Budget speech in nearly 20 years, clocking in at an hour and eleven minutes. However Philip Hammond still couldn’t find the time to mention climate change or energy.

James Court, policy and external affairs director at the Renewable Energy Association, has never spotted so few references to climate change in more than a decade-and-a-half of Budget-watching.

While he counted five mentions of nuclear fusion and eight of gas in the Red Book, the document that sets out the government’s Budget plans in detail, climate change did not even merit one.

What makes the lack of attention to the issue more glaring is the timing of the Budget, which came out exactly three weeks after the publication of an alarming report by the UN’s Intergovernmental Panel on Climate Change.

This warned that governments have just 12 years to put in place measures to prevent global temperature rising 1.5C above pre-industrial levels, the point above which increasingly catastrophic changes becomes harder to prevent.

The lack of measures announced in the Budget means this already short window has just got a lot tighter, says Dr David Williams, chief executive at renewable energy developer Eco2: “They said we’ve got 12 years to make a difference and we’ve now got 11.”

Richard Howard, head of research at Aurora Energy, says: “Given the government has just asked the CCC [Committee on Climate Change] to review measures for 1.5C, you would have thought there would have been something on climate change and more on energy. You might have thought there would be a bit more.”

Hammond’s clumsy feel for environmental issues was underlined by his merging of securing the planet’s future with measures to tackle plastic waste – notwithstanding that the latter was welcome.

Dr Jonathan Marshall, energy analyst at the Energy and Climate Intelligence Unit, believes the two issues shouldn’t be conflated. “Cutting down plastic waste doesn’t do much to deal with climate change,” he says.

The key proposal for the sector in an otherwise energy-light Budget was the Treasury’s plans for dealing with the UK’s climate change commitments in the event of a no-deal Brexit.

A key plank of Britain’s carbon reduction plans is its participation in the EU Emissions Trading System (EU ETS), which is in turn bound up with the UK’s membership of the wider trading bloc.

The centrality of the EU ETS only looks set to grow, says Court: “Once you start to go into the late 2020s and the 2030s when you will be transitioning gas off the network, it will be an increasingly important mechanism.”

Under the plans outlined by the government, a carbon emissions tax will replace the EU ETS if the UK is unable to agree a withdrawal deal by Brexit day at the end of next March.

The new tax would apply from next April to the approximately 1,000 big manufacturing plants and power stations that currently participate in the EU ETS. These plants would have to pay £16 for each tonne of carbon dioxide emitted over and above their free allowance under the EU ETS.

In addition, the Finance Bill contains legislation to pave the way for a range of longer-term carbon pricing options if the UK is unable to remain in the EU ETS.

Richard Warren, head of policy and representation at UK Steel, is worried by the lack of detail about the proposed tax. He is particularly concerned that UK businesses’ competitiveness will suffer if the EU ETS, currently around €22 euros, continues its fall from currently high levels.

He says: “We need to know details on how the ongoing tax will reflect fluctuations so that industry isn’t worse off than if the UK had stayed in the EU ETS”

But the publication of a hard figure gives the energy industry something to plan around, says Aurora’s Howard: “What the industry has been asking for is certainty. On no deal they have broadly given the maximum certainty they could. If we come out, we will have £16 per tonne.”

Carbon pricing

There is more disquiet surrounding the Red Book’s statement on the future of the carbon pricing level.

The government has said it will maintain the Carbon Price Support (CPS) rate freeze at £18 per tonne of CO2. It will then seek to reduce this rate if the total carbon price, which comprises the EU ETS price and the UK government controlled CPS, remains high.

The lack of clarity is a headache, says Howard: “The problem if you are a generator or a buyer of power is the uncertainty that still prevails.

“The total price you are targeting would have given people the certainty they need.”

Marshall agrees. “If you are preparing bids for the next T4 capacity market or for the next CfD [contract for difference] auction you are not going to be sure about what wholesale revenues to put into your models.”

Under the original proposals for the CPS regime laid out by Hammond’s predecessor George Osborne in 2011, the level was supposed to have increased to £30 per tonne by 2020 and then accelerate after that.

Marshall says: “That would have provided investors with the certainty they need.”

This lack of certainty about the direction of the carbon price will increase the cost of capital for new-build generation projects bidding to enter the capacity market, he warns, ultimately ending up with what the government has been so keen to avoid – higher energy bills for businesses and households.

However, the current chancellor hasn’t gone far enough to help hard-pressed manufacturers with their energy bills, counters Warren.

He points out that the increase in the EU ETS over the past year has pushed up the total carbon price level from around £25 per tonne at the time of the last Budget to £35-36/tonne. He says: “We are extremely unhappy that no action was taken on that and the impact that is having on long-term wholesale prices.

“He’s kicked the can down the road: we want immediate action to reduce the cost of carbon in the UK.”

But any cut to the carbon price would set back efforts to drive coal off the electricity generation mix, warn environmentalists.

The reduction in coal’s share, which shrank to zero for whole days during the past year, has been widely viewed as a success story. Aurora conducted research in the run-up to Budget day that modelled the relationship between the mix of fuels on the energy system and the carbon price. This showed that the more the carbon price is squeezed, the longer coal will remain in the mix.

Any short-term revival of coal on the system won’t change the fuel’s ultimate fate given the UK government’s commitment to phase out its use for electricity generation by 2025. The gradual retirement of coal stations is likely to continue, says Marshall: “You would expect coal to carry on at the margin and not being used too much.”

However, any slowdown in its reduction is nevertheless a cause for concern, says Court. “We need to be hitting targets consequentially and the carbon price is one of the important measures we have to change that behaviour.

“The coal ban is going to come in in the 2020s, but obviously every carbon tonne saved until then is also important.”