Comprehensive Spending Review: BDO Energy and Environment Response

The Comprehensive Spending Review, presented by George Osborne on Wednesday, seemingly saw the Department of Energy and Climate Change as one of the few winners with a 16.2% increase in funding, in real terms, over the period to 2014/15. As the dust begins to settle after the CSR announcement, it is interesting to look at the detail of DECC’s announcement:

• Whilst DECC saw a net increase in funding, this comprises an 18% drop in revenue funding and a 41% increase in capital funding. The Government is clearly recognising the significant support for infrastructure necessary to deliver on its environmental pledges. DECC ‘s quangos largely survived the recent cull, however the cuts to revenue funding will inevitably constrain activities. We do support the concept of government investing in improving the conditions for business to operate, whether that is world class infrastructure or competitive taxation. This way government still stays “out of the way” of business.
• The Government has reaffirmed its commitment to funding 4 carbon capture and storage (CCS) projects. Of these, funding of up to £1 billion for the first project was confirmed in CSR. The following projects will be funded through either general spending or a levy on electricity supplies, and a consultation paper on the issue will be published in November. This is tied to the review of the existing climate change levy and moves to develop support for the carbon price. This support for CCS will put the UK at the forefront of carbon capture market and will undoubtedly create significant opportunities for UK companies in the supply chain.
• A further £1 billion has been committed to establishing a Green Investment Bank. Details as to how this institution will work are scant, however Government intends to publish its detailed plans in Spring 2011. It is promised to “make a radical contribution to financing green infrastructure” and “tackle risk that the market cannot adequately finance”. We would hope that the bank’s remit is sufficiently defined to get the maximum benefit for the UK without an over-concentration in any one area, such as off-shore wind. The concept of a government funded bank focused on green investment is seductive but is not easy to rationalise. On one hand we welcome the commitment to low carbon funding, however governments are not usually good at efficiently allocating capital. We already own two major retail banks and it’s not clear why another instrument will do a better job than the market.
• Support for UK businesses in the low carbon economy is also evident in the £200 million commitment to invest in manufacturing facilities at port sites and technology for off shore wind and building energy efficiency. In establishing market drivers for increasing renewable energy generation and reducing carbon, the Government is clearly keen to ensure that UK businesses are able to benefit from the opportunities created. There is no indication of support for the supply chain to the nuclear industry, however, suggesting that UK businesses could lose out in the planned developed of nuclear power facilities in coming years.
• Government support for the Feed-in-Tariff regime post the review in 2012 has been confirmed, however it has been flagged that the tariffs will be rebalanced in favour of more cost effective carbon abatement technologies. The focus would therefore seem to be on the amount of carbon abated per £ of tariff, something which will undoubtedly be debated by the relevant lobbyists over the next two years.

Outside DECC departmental spending the CSR saw two other key environmental measures, confirmation of the Renewable Heat Incentive (RHI), and the changes to the Carbon Reduction Commitment (CRC)

• DECC has indicated that the RHI will be simplified, a measure which is definitely welcomed, but further detail on the scheme has yet to appear. Whilst efficiency savings through RHI are expected to grow to £105 mill in 2014/15, the ramp up from £5 mill in 2011/12 suggests the Government does not see any significant roll out of technology in the next 3 years.
• One of the lower profile announcements was the introduction of a stealth tax on large energy consumers though the withdrawal of recycling of payments under the CRC scheme. This is expected to result in a net tax take for the Treasury of over £1 billion by 2014/15. Whilst CRC reporting will apparently be simplified, what was meant to be a revenue neutral policy has now become a stick against the poorest performing CRC registered entities. Note that this is poorest performing in relation to the other registered entities, rather than poorest performing on an absolute scale, pushing businesses to do the maximum possible.

Elsewhere in the CSR, a £5,000 incentive scheme for purchasing new ultra low emission vehicles and government support for electric vehicle charging infrastructure were confirmed.

DECC has also indicated that it intends to position itself as an “enabler” in its dealings with the private sector. Steps will include creating the environment whereby residential householders can finance energy efficiency measures through future energy savings under the Green Deal. This will hopefully be a major driver in residential energy efficiency and hence a boost to the installer and supply chain industry.

Overall, we see this as series of very positive announcements for the energy and energy efficiency sectors, creating further impetus for activity at a residential level, and supporting major developments in CCS. Notwithstanding our reservations about whether government needs to create another publicly owned financial institution, the Green Investment Bank should be an opportunity to stimulate and encourage more private sector investment and risk taking. We await the further announcements in the Spring with interest.