BUDGET 2014 ENERGY EDITION OVERVIEW AND ANALYSIS The next General Election will be a battle between two opposing themes: Labour’s ‘Cost of Living’ campaign and the Government’s ‘Economic Growth’ narrative. The energy price rises of last winter provided the perfect springboard for Labour’s consumer-focused price freeze policy, to which the Government has struggled to provide a robust response. However, today’s emphasis on rebalancing the economy in favour of manufacturing and industry puts them firmly back on more comfortable probusiness turf. It also provides a strong indicator that energy policy going into Election year will be primarily geared to deliver industrial growth, rather than decarbonisation. A good day for heavy industry The Chancellor was perhaps unusually magnanimous in listing his support for a broad range of energy interests, from nuclear and shale gas to renewables, energy efficiency and low carbon vehicles. But the winners of the day were indisputably Britain’s energy intensive industries, which have argued forcefully that rebuilding the economy is dependent upon their sectors remaining competitive. Today’s Budget is therefore designed to shield them from the costs of decarbonisation policy for the foreseeable future. The £7.5bn package includes a freeze on the Carbon Price Floor from 2016 until the end of the decade; an extension of the current Energy Intensives Industries Compensation Scheme; and separate compensation effectively exempting industrial sectors from paying Renewables Obligation and the Feed-In Tariff subsidies. Industrial energy efficiency also received a boost in the reversal of a much contested 2011 decision not fully to exempt CHP from the Carbon Price Floor. The Carbon Price Floor freeze is already proving controversial however. While industry, consumer groups and the coal lobby have given the policy a hearty welcome, the impact on gas and low carbon technologies looks ominous. On the previous trajectory, gas would have become cheaper than coal around 2016/17, and the gas lobby had argued against a freeze on these grounds. However the Capacity Mechanism consultation (also released today) appears to essentially negate the risk of the Carbon Price Floor for new build gas and provides a strong incentive to invest. Most out of sorts, therefore, will be the low carbon lobby including many in the nuclear and renewables sectors. The Carbon Price Floor was always an unpopular policy, arguably more a revenue-generator for HMT than a policy designed to save carbon. However it was an investment signal
to low carbon industry which has now been fundamentally undermined. Existing nuclear will lose the windfall it would have gained, while the resultant lower power price could result in the Levy Control Framework funding pot being used up far faster than originally anticipated. Whether these grievances will reach the ears of the Chancellor over the roar of approval from industry is doubtful however. Other highlights Other measures include taking forward the recommendations of the Wood Report for a new regulatory and fiscal regime for North Sea oil and gas, and opening a consultation on a new allowance to support investment in ultra high pressure, high temperature oil and gas projects. It wasn’t all rosy for the North Sea industry however, as the Treasury closed a tax loophole around drilling rigs and accommodation vessels supplied using bareboat chartering arrangements. The Chancellor also increased the company car tax discount for ultra-low emission vehicles. Finally, after huge controversy over disputed figures on Government flood defence spending since budget cuts in the last Comprehensive Spending Review, the Government has now allocated additional £140m for flood defences.
Jessica Lennard
Director of Energy Public Affairs
THE HEADLINES HEAVY INDUSTRIES ENERGY BILLS
£7bn
package
=
£50,000
average saving for a midsized manufacturer
CARBON PRICE FLOOR FREEZE
£18/t
from
2016–20
FAMILY ENERGY BILLS
£15
average annual saving
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