The Chancellor's Spending Review and Autumn Statement was notably light on detail on energy, although George Osborne did say "there is no more important infrastructure than energy". What he did not mention (and instead left to an announcement to the Stock Exchange shortly afterwards) was that the £1 billion Carbon Capture and Storage budget was being withdrawn as he spoke.
We look at the main announcements from the Spending Review and analyse the industry reaction.
End of CCS competition
Arguably the biggest change to UK energy policy this autumn was not mentioned in the Autumn Statement at all – the cancellation of DECC's four-year-old Carbon and Capture Storage (CCS) competition. This has shocked the industry by its suddenness, and confirms the impression from Amber Rudd's "energy policy reset" speech two weeks ago that the end of unabated coal in the UK means the end of coal, rather than a renewed commitment to CCS to help reduce the carbon footprint of fossil fuel-powered generation.
Five years ago, the Government set aside £1 billion to support the development of CCS in the UK. The competition has been running for nearly four years, and had been whittled down to two players: the White Rose project at Drax in West Yorkshire; and the Peterhead project in Scotland. Back in September, Drax itself pulled out of the White Rose project (prophetically citing policy uncertainty), but the sudden withdrawal of funding has come as a major blow to Shell and SSE, the partners in the Peterhead project which will not now go ahead- at least not in the near term.
RHI and heat: the devil will be in the detail
There are mixed messages for the Renewable Heat Incentive (RHI) scheme. The good news is that the government will increase funding for RHI to £1.15 billion and continue it up to 2021, but at the same time it will reform the scheme to improve value for money, delivering savings of almost £700 million by 2020-21. A few days after the Spending Review, DECC gave the renewable heat industry some more detail of how this will work. It seems there will be an extra £210 million available to new projects in 2016 and in the short term it will be "business as usual", as any major changes to the RHI scheme would likely need State aid approval. However, in the longer term (from April 2017) there will be not only new degression triggers, but also overall caps on deployment – presumably similar to the proposals for the feed-in tariff for solar PV (see our article on the solar reforms). This means an increased execution risk for projects involving technologies with long lead times (such as biogas and biomethane) as the RHI cap may already have been reached, meaning no more subsidy is available, by the time they get to commissioning.
Other heat-related developments include the announcement that the government will provide £295 million over 5 years to improve the energy efficiency of schools, hospitals and other public sector buildings. There will also be over £300 million of funding for up to 200 heat networks, which will generate enough heat to support the equivalent of over 400,000 homes and leverage up to £2 billion of private capital investment. Again we await further details. What we do know is that heat will play a crucial part in the UK meeting its climate change targets, and that we can expect more policy announcements on heat next year.
Exemption for energy intensive industries – at the cost of renewables and vulnerable households
The government will provide an exemption for Energy Intensive Industries, including the steel industry, from the policy costs of the Renewables Obligation and Feed-in Tariffs (i.e. the Climate Change Levy), to ensure that they have long-term certainty and remain competitive. This is no surprise, given recent lobbying by the steel industry and the fact that the new infrastructure (such as HS2) being built will require significant amounts of steel over the coming years.
Ironically, exempting energy intensive industries from the CCL, instead of compensating them in cash, means that an extra £5 per year will be added to all customers' energy bills. This is nicely offset by the amount that the proposed reforms to the Renewables Obligation and Feed-in Tariff would save, so it looks like those cuts are a foregone conclusion.
A further £30 per year will come off energy bills as a result of scrapping the current Energy Company Obligation (ECO) scheme and replacing it with a new, cheaper scheme. Commentators criticised this as meaning that fewer homes will receive help.
Innovation is mainly nuclear
Commenting on the Spending Review and Autumn Statement, Secretary of State Amber Rudd said:
"As we transition to a low-carbon economy as cost effectively as possible, finding new sources of energy that are cheap, reliable and clean is essential, which is why we are boosting our spending on innovation and backing the industries of the future." This really means nuclear.
At least £250 million will be invested over the next 5 years in an ambitious nuclear research and development programme, including a competition to identify the best value small modular reactor design for the UK. This will pave the way towards building one of the world’s first small modular reactors in the UK in the 2020s.
However, overall, the government is doubling of investment in DECC’s innovation programme and this will benefit not only nuclear research but also promising new renewable energy technologies and smart grids, which is good news.
Support for shale
Up to 10% of shale gas tax revenues (if/when there eventually are some) will be put into a Shale Wealth Fund that will be spent in local areas. Whilst Greenpeace policy director accused George Osborne of "resorting to little more than bribery to convince the British public to support" fracking, it should speed up the planning process, meaning that investors are more likely to fund projects. Look out for a separate article tomorrow by Addleshaw Goddard Planning partner Gary Sector.
Bad news for community energy schemes
Osborne's speech confirmed that the tax breaks for community renewable energy generation schemes would be withdrawn from 30 November 2015, and all remaining energy generation schemes would no longer qualify for venture capital tax relief from 6 April 2016. Community Energy England served a letter before action (the first step in a judicial review legal challenge) on HM Treasury on 23 November challenging this withdrawal.
Cuts to DECC budget could have been worse
There seems to be a general feeling that with a 22% budget cut, DECC got off fairly lightly. But the Nuclear Decommissioning Authority needs to save over £1 billion, and there is concern about whether it will be able to ensure that the UK sticks to its carbon reduction commitments on such a reduced budget.