The Chancellor has published the results of the spending review, including details of the Department of Energy and Climate Change (DECC) budget over the course of this Parliament. The Government aims to release funds to be able to invest £4 trillion on its priorities over the next four years including half a trillion pound for the NHS.
To contribute to the release of funds, DECC will suffer cuts in resources of 22% by 2020. This will equate to £220 million of resource savings through efficiencies from pooling back office and corporate services and reducing the costs of contracts to manage the country’s historic coal and nuclear liabilities.
The Government announced that it is implementing measures to reduce the projected cost of green policies by £30 on the average annual household energy bill from 2017. The majority of the saving will come from reform to the Energy Company Obligation (ECO) scheme. This will be replaced from April 2017 with a cheaper domestic energy efficiency supplier obligation which will run to 2022. The new scheme will provide energy efficiency to over 200,000 homes per year, saving up to £300 off the annual energy bill and addressing the root cause of fuel poverty. This has been discussed prior to the announcement but no detail of the proposed new scheme has been released which, unless addressed, will lead to uncertainty for the energy efficiency manufacturing industry. To further address fuel poverty, there will be an extension to the Warm Home Discount to 2020-21 at current levels of £320 million a year, rising with inflation. This is a welcome announcement providing continuing support for vulnerable people.
The government will provide £295 million over 5 years to improve the energy efficiency of schools, hospitals and other public sector buildings. Separately, over £300 million of funding for up to 200 heat networks will generate enough heat to support the equivalent of over 400,000 homes and leverage up to £2 billion of private capital investment. As the public sector is a substantial user of energy, it is good to see that it will be setting an example to the business community.
Following the recent concern from the European Court of Justice relating to reduced rates of VAT on energy efficiency products, the Government will consult on legislation to ensure the reduced rate of VAT on energy saving materials is maintained in line with EU law. To comply with the Directive, some subsidies may need to be removed if they are found to be in breach of this.
The government has consulted on changes to the Renewables Obligation and Feed in Tariffs schemes and will shortly publish a response to the consultations. The focus is on how to control the costs of these schemes. There is the potential to save the average household around £6 and the average small business user £500 on their energy bills in 2020-21 if proposals are implemented. We should however give consideration to the requirement for incentivisation for increased generating capacity as a lack of security of energy supply poses significant risk for the UK economy.
The government will increase funding for the Renewable Heat Incentive to £1.15 billion in 2021 to ensure that the UK continues to make progress towards its climate goals while reforming the scheme to improve value for money, delivering savings of almost £700 million by 2020-21. This is a welcome announcement and one that was of surprise to the industry as it was widely thought that the RHI could be scrapped in the spending review. The detail of how this will translate into actual funding opportunities has yet to be announced.
Following consultation, the transitional period for electricity suppliers to apply the CCL exemption on renewably sourced electricity generated before 1 August 2015 will end on 31 March 2018. This is very much dependent on the supplier holding sufficient Levy Exemption Certificates to cover the energy being supplied and in reality it is unlikely that the majority of suppliers will be in a position to extend the deadline as far as 2018. In addition, whilst many business energy users wish to supply 100% renewable energy to tenants, the additional cost of circa 5% will not be sanctioned by the lease conditions and therefore we could see a shift away from purchasing renewable energy. Suppliers will therefore have to find alternative ways of securing green contracts if they are to improve their fuel mix and meet the Renewable Obligation.
The Government will also be funding an ambitious nuclear research programme that will revive the UK’s nuclear expertise. The government will provide over £11 billion for the Nuclear Decommissioning Authority (NDA) to continue its vital work cleaning up historic nuclear sites. Between 2016-17 and 2019-20 the government will save over £1 billion by making efficiencies and savings in the NDA through; better value contracts; top class commercial procurement; delaying non-safety-critical projects; and cancelling a project that is no longer needed due to a world-first breakthrough in nuclear decommissioning research.
It is clear that, whilst government focus remains on reducing public spending, there is commitment to providing for a greener and cleaner community. Unfortunately the cuts outlined will make immediate impacts on the drive to promote renewable energy use and will increase costs in the short term. Whether the aim to deliver savings to both domestic and business customers is achievable will be clearer as further announcements are made.