Budget reaction: mostly good news for energy consumers
Yesterday’s Budget had some positive news for business. An updated economic growth forecast of 2.7% for 2014 – almost a whole percentage point higher than the 1.7% predicted last year – puts us ahead of all other major advanced economies, according to Chancellor Osborne, including Germany, Japan and the US. Plus, of course, there’s a £7-billion package to cut energy costs for consumers.
However, freezing Carbon Price Support is likely to impact investment in much-needed low-carbon projects, especially so soon after the policy’s been introduced. So while this move is welcome to reduce bills in the short term, it could well undermine the creation of the secure and sustainable generation that we need to reduce bills in the long term.
Clearly, it’s a difficult balancing act. On the one hand, the UK needs to develop a low-carbon energy system as fast as possible, but funding the cost of much of this through energy bills places a sizeable burden on consumers.
Capped CPS delivers big savings
The UK-only Carbon Price Support has never been popular, especially among large consumers who find themselves disadvantaged when competing in international markets. But the cap proposed of £18 per tonne from 2015/16 is predicted to save a medium manufacturer £50,000 on annual energy bills, according to Osborne, and the average household £15, in 2018/19.
Industrial businesses looking to invest in onsite generation now have another reason to consider Combined Heat and Power (CHP) plant. From next year, all fuel used to generate electricity used onsite (but not exported) will be exempt from Carbon Price Support.
Energy intensives get compensation full house
Energy intensive industries (EIIs) will also welcome news that help towards Carbon Price Floor (CPF) and the EU Emissions Trading System (ETS) costs will be extended to 2019/20, although we are still waiting for the EU to give state aid approval for the CPF compensation scheme.
Plus, Osborne announced a new compensation scheme for EIIs to offset higher electricity costs from the Renewables Obligation and small-scale Feed in Tariffs from 2016/7. This means energy intensive customers will be compensated for all government low-carbon and renewable support policies.
Capacity Market design revealed
Finally, Osborne’s Budget documents confirmed final decisions for the Capacity Market design, ahead of the first capacity auction at the end of the year. Key points released by DECC include:
• 15-year capacity agreements will be available to new capacity. The government believes this will provide sufficient certainty to unlock investment in new gas plant, which it expects will include a range of new independent providers.
• Existing capacity will be able to access rolling one-year agreements, although three-year agreements will also be on offer to plant which needs to undertake significant refurbishment.
• Penalties for unreliable capacity will be capped at 200% of a provider’s monthly income and 100% of their annual income. The aim here is to provide a strong incentive for capacity to be there when we need it.
• The capacity auction will be capped at £75/kW to protect consumers from excessive costs.
So there you have it. No big surprises in this latest Budget, and some welcome help for UK businesses. But also some potential uncertainty for future investment in low-carbon generation.