The five big energy issues for next week’s British Budget

  • The funding that will be available for low-carbon electricity projects beyond the end of the decade
  • More details of the government’s overarching decarbonisation strategy
  • Clarity on the future of the Carbon Price Floor
  • Further insights into the government’s view on the competitiveness of the retail markets
  • Commitment to keeping costs down for energy intensive industries

 

By GARETH MILLER

With the UK budget next week, here are our top five issues that we think the Chancellor will be wrestling with on energy:

Levy Control Framework

We finally expect to hear in this Budget more details on what future monies will be available to support low-carbon capacity post-2021 through the Levy Control Framework, and how it will be accounted for.

Following criticism from a number of committees, and pent-up demand from developers, clarifying the envelope and accounting practices for funding beyond 2021 would close off a major source of uncertainty for both project developers and end-consumers.

The Government is under pressure to commit more funds to renewables support as the country progresses towards its legislated Carbon Budgets, which mandate emissions reductions. In doing so, it will have to find a compromise between the economic and social benefits of renewables development, and heightening rhetoric in the media about the impact of rising consumer bills.

It has already earmarked up to £730 million of money for three CfD auctions for less-established technologies commissioning after 2021, and the current LCF to 2021 is over-budget by approximately £1.3 billion.

Low-carbon strategy

The Emissions Reduction Plan has now been badged the Clean Growth Plan and is being positioned for early summer by officials and ministers, so we don’t expect to see anything substantive on it next week.

The rather high-level Industrial Strategy issued last month has already positioned a review on how to achieve a low-cost transition, but with no detail on what this will constitute.

In advance of the Clean Growth Plan, we don’t anticipate any change in this Budget on government’s attitudes to offering CfDs to onshore wind and PV solar.

In fact whilst rhetoric has improved on attitudes to the system costs of intermittency from BEIS, there is nothing concrete to suggest the Clean Growth Plan will deliver ‘subsidy-free’ CfD support to onshore renewables in the near future, despite the evidence of lower whole-system costs than previously thought.

The paradox of wanting to achieve the lowest-cost transition on the one hand, and the policy measures deployed on the other looks set to continue.

Carbon price

There was an expectation that the Autumn statement would clarify the long-term future of the Carbon Price Floor, beyond 2021. It didn’t, but Treasury at some stage must look to do so and are running out of time.

Aside from consumers needing to know the impact on long-term energy costs, from a wholesale market liquidity perspective the absence of certainty – if left to run into 2018-19 and thus captured in the natural forward market window – will eventually impact liquidity for post-2021 trades.

More imminently, the next T-4 capacity auction later in 2017 will be for 2021-22 and generators will expect to know if a carbon price will be in play and at what level. Crucially, BEIS has published wholesale reference prices for 2021-22 and 2022-23 for use in valuing projects bidding into the upcoming CfD auctions in April, which will have been directly influenced by BEIS’s assessment of the level of the Carbon Price Floor.

We think they must be factoring in a carbon price of £12/MWh-£13/MWh, inclusive of EU ETS. If carbon prices end up lower than this, BEIS could overspend on the auction budget in reality. The lack of clarity is in danger of backing BEIS into a number of troublesome corners.

Green paper on uncompetitive markets

The possibility of a general review of the energy market, as one of the key markets that it is feared are not working fairly for consumers, should also not be discounted – particularly given the backlash to the latest round of price increases.

Although there were no details of any proposed intervention when the prospect was announced in the Autumn Statement, a Green Paper was mentioned with a spring 2017 release date, and this could form part of the Budget announcement

Energy Intensive Industries

Although much of the focus could be on domestic bills, the impact on non-domestic bills in general and energy intensive industries (EII) in particular will also be important.

With the BEIS Select Committee already considering the impact of Brexit on the UK’s role within the EU Emissions Trading Scheme (EU ETS) and the potential of an EU-wide cap on emissions from EIIs, companies are already facing fresh challenges to their long-term planning. EIIs therefore need clarity and commitment from the government on this issue – particularly as they are already dealing with the changes announced in the Autumn Statement to the Carbon Reduction Commitment (CRC) and Climate Change Levy (CCL).

Gareth Miller is interim Chief Executive of Cornwall Energy Associates

Pixie Energy

Pixie logo Pixie Energy is an incubator and a facilitator of strategic research and project work, focusing on energy regulation, policy and markets at the local and national level. Find out more about Pixie Energy here.

Local Energy Matters: Scotland

Local Energy Matters: Scotland is a free-to-download brochure with a focus on energy tariffs in the two Scottish electricity distribution regions, as well news on local energy and low-carbon schemes.

Previous editions can be download here.

Scottish energy market overview

You can read an overview of the Scottish energy market here.

Scottish Government energy feed