Environment and renewable energy

Spending Review 2010

What we know

Significant investment from the Exchequer in environmental projects was secured. However this will in part be funded by changes to one of the previous Government’s flagship environmental policies which was originally designed to be revenue neutral and will impact both the private and public sector.

Over the course of the Spending Review period the Department of Energy and Climate Change will face an 18% reduction in its resource spending and a 41% increase in its capital spending (mainly to meet existing nuclear decommissioning liabilities). It will also have to implement the major market reforms which are proposed in the electricity sector and try and secure the £200billion of investment needed by 2020 to provide secure low-carbon energy.

CRC Energy Efficiency Scheme

The Scheme will be reformed such that revenues from the sale of carbon allowances are no longer recycled to participants, significantly increasing the financial impact on the approximately 4,000 public and private sector originations within the scheme. This will particularly affect larger energy users with an estimated increase of at least 7% on organisations’ energy bills in 2011/12. The Government estimates this will create revenues for the Exchequer of £715m in 2011/12, rising to £1,020m in 2014/15. There is an indication that some of these funds will be spent on protecting the environment, however, as with other environmental ‘taxes’, there is no formal ring fencing planned. In addition, the first allowance sales from government for 2011/12 emissions will be deferred from 2011 until 2012 to improve organisations’ short term cash flow.

Carbon Capture & Storage (‘CCS’)

The funding promised in the Coalition Agreement to finance the first CCS project is secure and up to £1billion will be provided from the public purse, rather than a levy on electricity supplies, thus being funded by taxpayers rather than electricity users. The Government is still committed to funding four projects but it is not yet clear where the additional funding required will come from and whether it will be sufficient to attract business interest, particularly following the recent withdrawal of a potential participant.

Offshore Wind

The £60m pledged by the Government for the upgrades to offshore wind manufacturing facilities at port sites has survived, which should help to maintain the UK’s position as the largest offshore wind generator and help to secure the required investment in the supply chain for renewable energy in the UK. There will also be funds available for research into offshore wind turbines.

Green Investment Bank

Funding of £1billion for the Green Investment Bank in 2013/14 has been secured, potentially supplemented by additional funding from the sale of Government owned assets. However, significant investment from the private sector which dwarfs the £1bn commitment from Government is still needed if the UK is to obtain the investment levels required to move to a low carbon economy. The role of the bank with this limited level of funding will also need to be carefully considered if it is to be effective.

Green Deal

As expected the Warmfront scheme will be phased out, saving approximately £345 million by 2013/14 to be replaced by a Green Deal allowing householders to improve the energy efficiency of their house at no upfront cost. The Green Deal represents a significant opportunity for the private sector to provide funding to and implement this initiative.

Feed in Tariffs (FiTs)

The announcement that any changes to FiTs, for renewable energy microgeneration, will be delayed until the next formal review will be welcomed by the renewable energy industry after rumours of retrospective reductions. However the threat of changes remains, particularly since the focus of reforms will be to support more cost effective carbon abatement technologies. Savings of £40m are expected by 2014/15. The next review is scheduled for 2012, or earlier if there is higher than expected deployment. In addition uncertainty still remains around the tax implications of FiTs in many business models and clarification is eagerly awaited by the industry.

Renewable Heat Incentive

After a long series of consultations, there is confirmation that the Renewable Heat Incentive is being implemented in 2011/12.

Energy Efficiency Technology for Buildings

There is a key focus on the role of technology in reducing emissions including funds for energy efficiency technology for buildings, although the extent of these funds is not clear.

Carbon price

There was also confirmation that consultation on reform of the Climate Change Levy to provide support to the carbon price, being considered as part of the Electricity Market Reform project, will be published in November.

Other measures

Other relevant measures included investment in flood defences as part of the UK’s climate adaptation planning and protection of the science budget which may assist low carbon research in the UK.

Deloitte view

The Prime Minister had previously pledged to make this the greenest Government ever and overall the Spending Review contained good news for the UK’s renewable energy and cleantech industries. Despite fears of swathing cuts across the board the Government has confirmed its commitment to a low carbon economy, although the cost of energy continues to rise. This comes at a time when the impending reform of the electricity market could further affect energy cost to businesses, consumers and other organisations.

Perhaps the most significant measure is the unexpected announcement that revenues from allowance sales in the CRC Energy Efficiency Scheme will be used to support the public finances to the tune of approximately £1bn by 2023/14. This will prove a significant cost to the organisations covered by the scheme and the Government is likely to come under increasing pressure for energy from renewable sources to be excluded from the Scheme; currently organisations must calculate the carbon emissions from energy purchased at grid average, regardless of its source.

With the changes to CRC some UK businesses will now be paying multiple levels of ‘taxation’ on their energy (potentially CRC, VAT, Climate Change Levy and EU ETS are all applicable). In the context of strategic priorities for corporates and public sector organisations, the bar for measuring, managing and monetizing energy has been significantly raised.

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