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Did the 2016 Budget address investor concerns over UK energy policy?

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If you’re currently considering a multi-million pound investment in British energy infrastructure you probably caught the relevant bits of the budget last week. For anyone who did not this blog is for you.

When my wife bought our flat she paid as much attention to the character of the estate agent as to the surveyor’s report and the state of the housing market. In a similar way, infrastructure investors are as interested in the character of the Chancellor of the Exchequer as they are in market fundamentals; you’re not going to invest your money unless the seller has earned your confidence.

The Chancellor can either bolster investor confidence or destroy it. That is not because the Chancellor’s views are as important as market fundamentals like declining gas demand, or the fact that China spent almost three times as much as the EU on clean energy last year. If the Chancellor decided he wanted to build a new fleet of gas power stations he would quickly run into a legally-binding-Climate-Change-Act-shaped wall and no one would invest. In fact that’s exactly what has happened.

The Chancellor cannot force anyone to invest in Britain’s energy infrastructure. Like an estate agent his job is to give investors the confidence that the thing they already want to buy is a safe bet.

Publicly the Government has attempted to shrug off assertions that energy policy changes have dampened interest in UK energy infrastructure investment. But a recent report by the Energy and Climate Change Select Committee, which consulted widely with investors and developers, disagreed. The report identified six things damaging investor confidence. Below summarises how well the Chancellor addressed these concerns in his budget:

1. Sudden and numerous policy announcements

Budget impact: Better

Changes to Climate Change Agreements and the abolition of Carbon Reduction Commitments were expected and consistent with the findings of a recent public consultation.

The decision not to scrap compulsory carbon reporting was also expected and consistent with the majority of responses to a recent public consultation.

2. A lack of transparency in the decision-making process

Budget impact: Worse

The announcement of an energy flat tax (“Climate Change Levy”). Previous carbon taxes failed to reflect the carbon content of fuel. Reform was an opportunity to change that but instead the Government has chosen to ignore the carbon content and institute a higher rate flat energy tax.

3. Insufficient consideration of investor impacts

Budget impact: Worse

The decision to cap the carbon price at £18/tn up to 2020 means it will be 40% less in nominal terms by 2020 and 50% less in real terms (£15.20) than the target price of £30/tn announced in 2011. This is also far less than the estimate of £72/tn by 2030 which is used by the Department of Energy and Climate Change. This is a significant disincentive for investment in energy efficiency and decarbonisation and risks undermining the credibility of the Government’s core energy policy projections.

4. Policy inconsistency and contradictory approaches

Budget impact: Worse

The failure to confirm levy funding for renewable beyond 2020 (apart from some offshore wind) and the commitment to further cuts to the Department of Energy and Climate Change undermine confidence that the Government has a plan to meet legally-biding Carbon Budgets.

5. Lack of a long-term vision

Budget impact: No Change

Some long term vision on demand response, storage and interconnection but without clear funding.

6. A policy “cliff-edge” in 2020

Budget impact: Better

Levy funding for offshore wind announced for 2021-2026.

Energy policy is still a mess. The budget did nothing to change that. That may not surprise anyone who lives and works here. But in every other country where E3G works investors and Government Ministers alike are confounded that the British Government seems comfortable to be left behind.

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