The Budget 2016 has sought to reform several clean energy taxes as well as provide additional support for less established technologies in a bid to further meet “the UK’s ambitious environmental targets in a cost-effective way, ensuring value for money for the taxpayer and retaining protection for the smallest and most energy intensive businesses.”

Key points:

  • the allocation of £730m over the course of the current Parliament for further rounds of contracts for difference auctions for offshore wind and less established technologies
  • abolishing the CRC scheme with effect from the end of the 2018/19 compliance year
  • CCL main rates will increase in line with RPI from 1 April 2017 and 1 April 2018
  • maintaining existing Climate Change Agreement Scheme eligibility criteria in place until 2023 with energy efficiency goals through a DECC-led target reviews starting in 2016
  • CPS rates to remain capped at £18 t/CO2
  • CPF level is fixed although we understand that further changes could be announced in the Autumn Statement
  • Tax deductibility of debt to operate at group level
  • No mention of business rates. The position on this is expected shortly although we understand that the levelised position will not change

It is expected that carbon reporting and discounts for large users will be clarified in the Autumn Statement.

Regulatory reform

E-Serve and Ofgem will split so that Ofgem can focus on economic regulation and promoting competition. In addition, Ofgem and DECC will review energy supply license conditions “to ensure that they are as clear as possible” and do not serve as a barrier to companies entering the market, expanding or innovating.

Contracts for Difference

The Budget announced £730 million to be made available for up to 4GW until 2019/20 for less established technologies including:

  • offshore wind (support to be capped at £105MWh (2011/12 prices), reducing to £85MWh for projects commissioning by 2026).
  • wave & tidal streams
  • advanced conversion technologies
  • dedicated biomass with CHP and anaerobic digestion
  • geothermal

The first auction will run this year and offer £290 million of support for delivery 2020/21.

We expect DECC to announce the procedural requirements shortly including the strike price for technologies other than offshore wind which is known.

A market stabilisation CfD is still being considered.

Smart Technologies

The Government has welcomed the National Infrastructure Commission’s energy study “Smart Power” (March 2016) as a further opportunity to transform the electricity sector, identifying strategies for flexibility to meet varying demand, storage and better network management. The Government will allocate at least £50 million for innovative energy storage, demand-side response and other “smart technologies” over the next 5 years.

Ofgem is expected to consult later this year on the future of the £100 million Network Innovation Competition to maximise the delivery of “genuinely innovative projects and technologies.”

Interconnection

The Government has recognised the importance of interconnection for the future of energy in the UK and consequently supports increasing the market delivery by 80% (at least 9GW of additional interconnection capacity).

Leveraged renewables projects – Budget confirms introduction of cap on interest deductions

It has been confirmed in Budget 2016 that a cap in the UK tax deductibility of interest payments will be introduced from 1 April 2017. This restriction will be of particular relevance to the leveraged financing of renewables projects, where the availability of tax deductions for interest payable is often a key component of the financial model for a project.

Full details of these rules are not yet available, but it is now known that the cap will be set at net interest expenditure that exceeds 30% of EBITDA and that there will be a variety of additional exemptions and threshold tests. Importantly, no mention has been made in the Budget statements that, as had been hoped, this cap would only be applied to related party debt, so it should be anticipated that third party financing will be also be caught.

Helpfully for renewables projects, the proposed exemption for financing taken to fund infrastructure projects with a public benefit has been retained and it is hoped that this will include many renewables projects within its scope. However, business will need to consider the detail of the relevant legislation carefully when released to understand the full scope of the proposed interest cap.