Spring Budget 2016 and the Energy Industry – No Great Surprises Here!

Spring Budget 2016 and the Energy Industry – No Great Surprises Here!

  • 16 Mar 0

The Chancellor has completed his Spring Budget speech which included several announcements for the energy industry. Initial results from the Business Energy Tax Review have also been presented. The key points are as follows:

  • The abolition of the Carbon Reduction Commitment (CRC) came as no surprise. As a direct result of the Business Energy Tax Review, the scheme is far too complex from both reporting and administration perspectives. Its original aim was to encourage energy reduction for large scale business users but modifications to increase revenue for HM Treasury transformed it into a tax.
  • The revenue currently raised from the CRC Scheme will be replaced by an increase in Climate Change Levy (CCL) from 2019. This will result in all commercial businesses will now be required to pay an increased energy tax through supplier invoices.
  • The most energy intensive industries will be protected from the increase in CCL through Climate Change Agreements (CCA). CCAs give energy-intensive industries a substantial discount of up to 90% on CCL as long as they meet government-agreed energy efficiency improvement targets.
  • The number of industry sectors eligible for CCAs will be extended.
  • Up to £730 million will be made available in future auctions to back renewable technologies. The Government is now inviting bids to help develop the next generation of small modular reactors.
  • The Oil and Gas sector will further benefit from tax cuts building on those announced in 2015. The Supplementary Charge on oil and gas companies ring fenced profits will reduce from 20% to 10% backdated to 1 January 2016.
  • The Petroleum Revenue Tax (PRT) will also be effectively abolished. PRT is a tax on the profits from oil and gas production in the UK or on the UK continental shelf from fields that were approved before 1993.
  • Fuel Duty will be frozen for the sixth year in a row providing a saving of £75 a year to the average driver

The most significant announcement is the abolition of CRC but there has been consensus across the industry for some time that this would and should be the outcome of the Business Energy Tax Review. Whilst no confirmed end date has been provided, the announcement that CCL will rise in 2019 suggests that the CRC reporting mechanism will remain in place until the end of Phase 2; the last reporting year being 2018-19.

Essentially the Chancellor has not delivered any surprises to the energy industry. Given the concerns with regard to renewable generation and security of supply, it seems that it is a missed opportunity for the Government not to provide incentives to encourage investment in cleaner generation and demand side response. The supply margin for winter 2017 is currently predicted to be 1% and further years are expected to be tighter. The Government is focussing on the capacity market to ensure there is adequate supply but the cost is high and it is heavily reliant on coal which is damaging to the environment and not sustainable. Whilst up to £730 million has been pledged to support renewable technologies such as offshore wind, it is not expected to make an impact until 2021. In addition, the UK needs investment on a much larger scale to build long-term, reliable generation as is proposed at Hinkley Point C to replace the aging infrastructure. Whilst the budget offers some positives, it would have been more encouraging to see the Chancellor incentivising private sector investors to support longer term, larger generation projects now, given the timeframes involved in bringing such developments to fruition and the current infrastructure concerns.


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