Sink or swim: No new subsidies for UK renewables until 2025? 

United Kingdom

The 2017 Autumn Budget appeared not to deliver on the promise in the Clean Growth Strategy to put clean growth at the “centre” of the government’s modern Industrial Strategy. New low carbon electricity levies will not be introduced for at least eight years under current forecasts, and the government will continue to target a Total Carbon Price of roughly £24 per tonne of CO2 until unabated coal is no longer used. One silver lining for the power (in particular the renewables) industry is the government’s support for electric vehicles, which have received additional funding and tax relief.  

Low Carbon Electricity Levies

The Control for Low Carbon Levies, published at the same time as the Budget, states that there will be no new low carbon electricity levies until the burden of such costs falls. On the basis of current forecasts, this will not occur until 2025. Existing commitments will be honoured, including up to £557m (in 2011-2012 prices) for additional Pot 2 Contracts for Difference (“CfDs”) from Spring 2019.

However, the Treasury makes two exceptions to the moratorium on new low carbon electricity levies:

  • New levies may be considered if the aggregate of existing levies is forecast to have a sustained and significant fall in real terms;
  • New levies may be considered where they have a net reduction effect on bills and are consistent with the government’s energy strategy.

Although the Budget does not make this explicit, these exceptions indicate that the government may support subsidy-free schemes where the price for low carbon energy is below the wholesale market price. Nevertheless, the moratorium on new low carbon levies has been met with dismay in the industry and casts doubts on the role of less established technologies and projects, such as the £1.3bn tidal lagoon project planned for Swansea Bay. It also raises questions on how the UK will meet the targets set in the Fifth Carbon Budget.

Will there be no more CfD auctions? Or is the expectation that they will be re-cast as a subsidy-free arrangement for some or all of the technologies that are able to achieve grid parity?

If a CfD is being offered at a price that is calculated to be the anticipated wholesale price of power, this would take away price volatility risk for projects such as offshore wind which have very high upfront capital costs to recover. Separately, if the CfDs are offered at a subsidy-free level, there may be an argument that there should be no cap on the volume of CfDs available.

It will be interesting to see how the government squares the position in the Budget with policy objectives to catalyse and encourage more immature low carbon technologies, and whether alternative arrangements emerge to support these on a case-by-case basis.

Total Carbon Price

The government has stated that they are “confident” that the Total Carbon Price – the sum of the UK Carbon Support Price (~£18/tonne CO2) and the EU Emissions Trading System (~£6/tonne CO2) – is set at the “right level”; this level of around £24 per tonne of CO2 will continue to be targeted “until unabated coal is no longer used”. While this provides some clarity on government policy, it also raises a number of questions.  First, the ambiguity of the language does not commit the government to this policy. It is not clear what happens to the Total Carbon Price if the EU ETS price changes, or if the UK withdraws from the EU ETS as part of the process of leaving the European Union. Second, analysis by Aurora indicates that keeping the Total Carbon Price static risks a resurgence of coal generation in the early 2020s. Many developers and investors had factored an increase in the Carbon Price into their valuations but a long-term freeze in the Total Carbon Price improves the economic argument for coal generation. Third, it does not provide any clarity on what happens to the Total Carbon Price once coal has been phased out.

Electric Vehicles 

The Automated and Electric Vehicles Bill 2017-2019 has passed its second reading in the House of Commons and will be sent to the House of Lords in the coming weeks.  As an additional strand in the government’s approach to the transition to zero emission vehicles and fully self-driving cars, the Treasury has earmarked £200m for investment in a Charging Investment Infrastructure Fund, a figure to be matched by private investment. The Treasury also announced that £100m will be provided to fund the Plug-In Car Grant to 2020, and, from April 2018, there will be no benefit in kind charge on electricity that employers provide to charge employees’ electric vehicles.

A Boon for Fossil Fuels

In welcome news for the British oil and gas industry, the government has frozen the fuel duty escalator for Liquefied Petroleum Gas in 2018-2019, alongside the main rate of fuel duty. In addition, new measures allowing the tax history of North Sea assets to be transferred from sellers to buyers, mitigating the effective cost of decommissioning for buyers of late-life assets, have been announced. Please see this CMS blog post for full details. 

What next?

The Industrial Strategy White Paper was released on 27 November 2017, which lists maximising the advantages for the UK from the global shift to clean growth as one of its four “Grand Challenges”.  Furthermore, a consultation has been issued on Professor Helm’s Cost of Energy Review, which proposed radical changes to the UK energy market. This consultation closes on 5 January 2018.