Lobby: Hammond’s holding pattern budget

Last week's Budget failed to give any new answers the sector has been waiting for, instead stating more details will be coming later in the year.

Last week’s Budget was the latest ‘last’ spring Budget.

It will also be the last chancellor Phillip Hammond delivers to the House of Commons prior to Article 50 being triggered and the formal start of the UK’s exit manoeuvres from the European Union. This significantly shaped the content of his red ministerial box.

Hammond’s main agenda was to ensure Britain is fit to face Brexit head-on. This involved tax reforms, tackling the skills crisis, and pushing the UK’s place as a technology hub.

It had been hoped the Budget would be energy policy heavy, and set the framework for the sector way into and beyond the next decade. We got some of this as Hammond stated the levy control framework will be replaced with a “new set of controls”. The details will emerge later this year – potentially in the autumn Budget.

A further green glimpse into 2017’s second budget will come because the chancellor’s promised to provide more details of his target to a total carbon price.

The holding pattern continued as the retail green paper is still in the to be published “shortly” pile.

More action was set out the address the UK’s looming skills crisis, with £500m a year being provided to support the new technical qualification – the T-level – as well as further funding to boost the development of disruptor technologies.

The Finance Bill 2017 will also set out changes to the revaluation process for business rates will also be reformed to make it “smoother and more frequent”. This has angered the renewables sector, especially solar developers.

The oil and gas sector was the beneficiary of another Budget boost as Hammond stated the government will publish a formal discussion paper will be published “on the case for allowing transfers of tax history between buyers and sellers”. Big businesses are also set to profit from the fall in corporation tax, which will fall to 17 per cent in 2020.

Over these new few pages, Utility Week will look in more detail at the impact of Hammond’s first Budget will have for utilities, and how his vision for a Brexit-proof Britain will being to unfold.

“A decision to create a new set of controls to replace the levy control framework is a welcome one. The LCF was created to provide support for low carbon technology at the lowest cost to consumers, yet costly deals such as the Hinkley Point C nuclear contract have been agreed outside of the official framework and auctions have repeatedly been delayed or abandoned, proving that the mechanism is not working as it should do.”

David Cockshott, chief commercial officer, Inenco

“The chancellor’s announcement of funding for research into batteries for electric vehicles is a positive first step, but it doesn’t go far enough. The transport sector trails the energy and industrial sectors on decarbonisation.”

Natalie Bird, senior consultant, Baringa Partners

Brexit looms large over 2017 Budget

One of the many concerns about Brexit is that it will consume so much attention that the government will have scant time left over to deal with anything else.

For the energy sector’s Whitehall watchers, that theory has gained legs following last week’s Budget.

The first disappointment for Labour’s shadow energy minister Alan Whitehead was that chancellor of the exchequer Philip Hammond’s Budget speech didn’t even mention energy.

His disgruntlement was compounded when he downloaded the Red Book, which sets out the details of the Budget statement.

Last November’s autumn statement had contained a pledge the 2017 Budget would set out the government’s plans on the future of the Levy Control Framework (LCF).

However, the LCF, which lays out caps on the subsidies via customers’ utility bills for low carbon energy technologies, still looks very much like a work in progress. Instead of a new look framework for subsiding the economy’s decarbonisation, the Budget merely contains a commitment to produce a new set of controls ‘later this year’. Further details on carbon prices for the 2020s will be set out in the autumn.

Technically speaking, as Whitehead acknowledges, there will be a second Budget in the autumn.

While this technicality may get the government off the hook in terms of honouring its November commitment, it still leaves investors high and dry.

The existing LCF runs out in 2020, which already leaves the promoters and developers of low carbon generation energy with little certainty about how schemes will be supported after then.

“We are now two and a half years from a cliff edge as far as the LCF is concerned,” says Whitehead who points out that renewable projects generally need at least four years lead-in time before they can be deployed.

Responding to the Budget, Renewable UK executive director Emma Pinchbeck says: “Projects being thought about today will come on line in the 2020s, after the period covered by the LCF expires. We need to ensure that developers and investors in wind, wave and tidal energy projects have certainty so that projects can be built, economic returns can flow and consumers can benefit from the low cost of renewables.”

Sir Ed Davey, the former energy secretary at the defunct Department of Energy and Climate Change (Decc), says investors are “already spooked and nervous” by the government’s repeated failure to come up with a new framework.

The former Lib Dem MP believes the delays are a knock-on consequence of the way that Brexit is consuming ministerial attention, compounded by last summer’s Whitehall reorganisation that led to Decc’s absorption into the new look BEIS department.

“I suspect that it’s because they (BEIS) haven’t worked out what to do and haven’t squared it with No 10 and No 11 (Downing Street).”

With the government under continuing pressure over power bills, as they would have been reminded about during this week’s emergency House of Commons debate on the topic, ministers face tricky issues about the shape of the new subsidy framework.

These include how to delineate between relatively mature and cheaper technologies, such as solar and on-shore wind, and the less tried and trusted alternatives that will require more subsidy.

Davey stresses he is not wedded to every aspect of the existing LCF. But he argues it would be a “big strategic mistake” not to offer support that will enable relatively immature technologies, like tidal power, to become cost competitive over what he says are “relatively short” periods in the history of energy policy.

Richard Black, director Energy and Climate Intelligence Unit says much of the budget for whatever replaces the LCF may have already been allocated by 2020.

“After 2020, we may have bespoke projects for which Contracts for Difference (CfD) have been agreed, even before there was any cap on spending,” he says, pointing out it is feasible that as well as Hinkley C nuclear power station, deals for at least one tidal lagoon and a further atomic plant may have been approved.

But it’s not just in relation to low carbon generation that sclerosis appears to have gripped Whitehall energy policy.

This spring is meant to see the publication of a consumer green paper. Apart from a few lines about curbing shady subscription practices, there was little detail about what the flagship paper will contain.

Whether energy customers should be offered loyalty bonuses is understood to be one of the points of controversy surrounding the green paper. Business and energy secretary Greg Clark is on the record voicing support for the idea, on which stance he is understood to enjoy the backing of prime minister Theresa May. However, the more temperamentally free market Hammond is understood to be less keen, preferring to rely on the development of a competitive market.

He had his run ins with No 11 when in government, but on this issue Davey reckons the Treasury has is right. “No 10 have got themselves in a total mess about retail price regulation of energy by refusing to recognise that we have a pretty competitive retail energy market.”

But with Hammond battered by the row over national insurance contributions, his department will be in a weaker position to argue its case.

David Blackman, policy correspondent

“The Budget speaks to many of our core priorities around growth, regions, investment and skills. Growth is at the heart of the government’s industrial strategy and it’s therefore welcome that the economy is growing faster than expected this year.
“Welcome too is the focus on investment and on skills, where the introduction of T-Levels for technical qualifications will help turn the tap on our talent pipeline in core water and waste businesses.”

Pennon chief executive Chris Loughlin

“This budget was at best a placeholder for the renewables industry, resulting in more questions than answers.

“This budget has created new uncertainty around the levy control framework beyond 2021. The industry was expecting an announcement regarding the future budget levels and structure but this has been delayed and instead we face a new regime and no clarity on the proposed new ‘set of controls.’”

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

CEO view

“In terms of energy and investment in infrastructure it was perhaps a quieter Budget. The long-awaited Carbon Price Floor (CPF) post-2020 was once more paused upon. Industry needs greater clarity about the long-term direction of the CPF, but we do recognise this might be difficult to provide with the UK’s membership of the EU ETS post-Brexit unclear.”

Lawrence Slade, chief executive, Energy UK. Read the full column here

“Energy infrastructure takes time to build. Projects being thought about today will come on line in the 2020s, after the period covered by the LCF expires.
“We need to ensure that developers and investors in wind, wave and tidal energy projects have certainty so that projects can be built, economic returns can flow and consumers can benefit from the low cost of renewables”.

Emma Pinchbeck, executive director, Renewable UK

“The chancellor’s statement on carbon pricing indicates that the government is preparing for a Brexit scenario in which the levers driving decarbonisation are pulled entirely nationally. If we come out of the European emission trading system, which is likely, a UK carbon price will be essential. But ministers need to say soon what the price will be, because energy companies are already signing power contracts for 2021.”

Richard Black, director, Energy and Climate Intelligence Unit

Foggy future for funding

The Budget revealed carbon arrangements will be reviewed, with the aim of targeting a “total carbon price”, says Nigel Hawkins.

Almost 20 years ago, the incoming Labour government introduced a highly controversial Budget. At its heart lay a one-off £4.5 billion net
windfall tax on the privatised utilities, virtually all of which Labour believed had been privatised too cheaply. Close to £2 billion was subsequently paid by the privatised electricity companies, while a further £1.6 billion was contributed by the water companies.

This time round, the impact of the 2017 Budget, presented by the new chancellor, Philip Hammond, was far less eventful, although the fierce argument raging over raising Class 4 national insurance rates – and whether it breached the Conservative Party’s 2015 manifesto – has occupied many column inches.

There were, though, several issues aff ecting the UK utilities sector that merit comment, although the market reaction of quoted utility stocks to the 2017 Budget was muted.

The future of the carbon floor price is relevant. In recent years, it has been instrumental in driving down the level of UK coal generation. The current carbon arrangements are now subject to review, with the revised aim to target “a total carbon price”.

Also within the electricity space, Hammond announced the oft-criticised Levy Control Framework (LCF) would be scrapped; it would be replaced by a “new set of cost controls for energy subsidies”. The LCF was established to prevent the cost of subsidies funded by levies on customers’ energy bills from spiralling out of control. The framework places caps on the amount which can be spent each year on schemes such as contracts for diff erence and the feed-in tariff (FiT) between now and 2020/21.

In recent years, the government has been forced to take action to head-off a projected £1.5 billion overspend by the last of the year of the budget – closing the renewables obligation early and enacting sharp cuts to FiT rates. Hinkley Point C, with its £92.50/MWh strike price, was set to leave a big dent in the budget had it continued.

Hammond confirmed that the LCF will not continue beyond then. Given the lead time to plan, finance and develop most renewable projects, there are concerns that an investment hiatus will occur until the details of the new regime become clearer.

In the lead-up to the Budget, there had been much discussion about the sharp increases in business rates, following the recent revaluation. Of the water companies, Severn Trent is a substantial payer of business rates. In 2015/16, it contributed more than £77 million, compared with the £48 million cost incurred by Thames, which has a smaller supply area.

Following vigorous pressure from many business organisations, especially in the south of England, the government has announced various rebates. It is still not totally clear whether utilities based there, such as Southern Water, will derive any benefits from the many adjustments.

Undoubtedly though, soaring business rates are adversely impacting the potential of many renewable projects, notably hydro and solar power.

While tax cuts were not a central feature of the spring Budget, Hammond did reaffirm that the base rate of corporation tax, currently 19 per cent, would fall to 17 per cent by 2020.

Furthermore, there were no major corporation tax changes to current capital allowances and the deductibility of interest costs; these factors have markedly reduced the annual tax yield from many water companies.

More generally, the latest data from the Office for Budget Responsibility (OBR) showed that the enormous public sector net borrowing figure is forecast to increase in 2017/18 from the latest projection for 2016/17 of almost £51.7 billion.

With global interest rates, led by the US, now set to rise, the UK may find it more difficult than previously to fund its public debt. Higher interest rates would drive that figure higher. They would also present highly geared utilities with a greater financing challenge than they have faced for some years.

Nigel Hawkins, director, Nigel Hawkins Associates