The Budget 2014: An Edelman Analysis - Energy Special by Edelman

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

BUDGET 2014 ENERGY EDITION REACTION AND COMMENT MEDIA

POLITICAL Rt Hon Ed Miliband MP

Andrew Neil

The Government… tell people that their energy bills are falling when they are rising… They will not stand up to the energy companies and freeze energy bills, even though the public support it.

Via Twitter: Freezing the carbon floor price and shovelling £7bn to heavy industry to cope with energy prices marks further crack in green consensus.

Leader of the Opposition

Chairman, The Spectator

Terry Macalister

Tim Yeo MP

Energy Editor, The Guardian

Chair of the Energy and Climate Change Committee

Via Twitter: Osborne has frozen the carbon floor price in the budget. Jam today (lower bills), damn tomorrow (less action against climate change).

Freezing the price of carbon here could also eventually make dirty, polluting coal power stations more economically viable in the UK. This could potentially divert investment from some cleaner technologies including gas.

Will Nichols

Baroness Worthington

News Editor, BusinessGreen

Little for the green economy, further uncertainty for clean energy investors, no mention of the threats of climate change or resource scarcity, and still no clarity on when the Green Investment Bank can borrow.

Shadow Spokesperson for Energy and Climate Change

Via Twitter: Treasury/DECC mishandling of energy policy will have serious consequences in terms of gas investment. Ironically.

THINK TANKS AND THIRD SECTOR

INDUSTRY Terry Scuoler

Dr Doug Parr

The Chancellor said this would be a Budget for manufacturers and he has delivered on his word. The Government clearly recognises the need to make the competitiveness of the UK a priority.

The government would be better off using this money to help UK industry become a world leader in energy efficient manufacturing, increasing their profits and helping with climate change.

Chief Executive, EEF the manufacturers’ organisation

Nina Skorupska

Chief Executive, Renewable Energy Association

The Chancellor is rowing back on his own policy and once again moving the goalposts for investors in green energy. Government must explain in black and white how investment in renewables is protected from the freeze.

Chief Scientist, Greenpeace UK

Will Straw

Associate Director for Climate Change, Energy and Transport, IPPR

Via Twitter: Osborne quite right to cap carbon price floor. @IPPR been calling for this for 3 years.

Malcolm Webb

Professor Lord Stern of Brentford

It is perplexing given today’s other good news that the Government has chosen to proceed with the bareboat measure. This can only increase costs on the UKCS where operating costs have increased sharply in recent years.

If the Chancellor wanted to reduce costs for businesses, he should have simplified the existing myriad of policies which have created a complicated and inconsistent system of carbon pricing across the economy.

Chief Executive, Oil & Gas UK

Energy UK In the overall interests of the UK the energy industry supports capping the carbon price floor… But it also has downsides - an important one is that it worsens the economics of the essential generation of electricity from gas.

Jessica Lennard Director of Energy Public Affairs jessica.lennard@edelman.com

Robert Jeffery Senior Account Manager robert.jeffery@edelman.com

Tristram Denton Account Director tristram.denton@edelman.com

Chair, Grantham Research Institute on Climate Change

Richard Lloyd

Executive Director, Which?

A cap on the Carbon Floor Price is a win for all consumers and something we have long called for.

Clementine Cowton Tom Dammers Account Executive Account Executive clementine.cowton@edelman.com tom.dammers@edelman.com