april 2009 budget

The Budget 2009 report contains a section entitled ‘Building a Low-Carbon Recovery’ which comprises a raft of measures with the combined aims of addressing climate change and encouraging economic growth by providing, the report claims, an additional £1.4 billion to the low-carbon sector. Reaction to the main thrust of the Budget - concerning the scale of the Government’s borrowing, spending plans and personal taxation - has been almost universally negative, and this has largely overshadowed reporting of the Budget’s “green” aspects. In fact, these measures to combat climate change were on the whole well received, although unsurprisingly many argued they did not go far enough.

The low-carbon features of the Budget are summarised below.

EMISSIONS REDUCTION TARGETS

The Climate Change Act 2008 established a Climate Change Committee (CCC), one of whose tasks is to advise the Government on the ‘carbon budgets’ which are necessary in order to provide the required trajectory to meet the UK’s overall 80% by 2050 emissions reduction target. This latest fiscal Budget from the Chancellor is the first to incorporate this ‘carbon budget’ element, and the Chancellor has largely followed the CCC’s advice by announcing two sets of carbon budgets. One set will apply straightaway (so called “interim budgets”), whilst the second, more ambitious, set of budgets (”intended budgets”) will apply if and when a new global climate change deal is reached to replace the Kyoto Protocol which expires after 2012.

The third carbon budget covers the period 2018 - 2022. Whereas the Climate Change Act currently requires this carbon budget to be set at not less than 26% lower than the 1990 baseline, the proposed levels for this third carbon budget (34% interim; 42% intended) are consistent with a proposal to amend the Climate Change Act to increase that requirement to 34%.

Significantly, the Treasury has indicated it intends to meet this 34% target entirely through emission reduction measures taken in the EU and without the use of carbon offsetting from outside the bloc. Some have argued that the reductions level for 2020 should be higher if we are to have a real chance of meeting the 2050 target but in any event, the budget levels as set put a line in the sand which should assure investors in low-carbon technologies and projects that there is long term government commitment to combating climate change.

These carbon budgets now require Parliamentary approval before 1st June 2009.

ENERGY AND RESOURCE EFFICIENCY

There have been many government initiatives over the past few years to increase energy efficiency in buildings, and this Budget continues to provide support to existing schemes as well as allocating funding for some new measures. A total of £365 million has been pledged. £100 million will go to help local authority landlords in England to bring existing domestic properties up to the Decent Homes standard by 2010. In combination with measures to increase new housing supply, also announced in this Budget, £100 million will go towards helping local authorities to construct new housing to higher energy efficiency standards. A further £100 million will be distributed in England by the Carbon Trust by way of low-cost loans to SMEs to fund increases in the energy efficiency of their buildings. Finally, £65 million will go into loans for the public sector, administered by the Carbon Trust’s Salix to accelerate public sector investment in energy efficiency technology installation in English public buildings.

DECARBONISING ELECTRICITY GENERATION

The Budget provides key support for three sectors in the low-carbon power generation industry: offshore wind, combined heat and power; and carbon capture and storage. It also includes measures to support small-scale renewable energy technologies.

Offshore wind

In an effort to clear the blockage of offshore wind projects currently stalled for (amongst other things) lack of debt finance, the Budget announced a review of the new Renewables Obligation banding structure with the intention of increasing the number of Renewable Obligation Certificates (“ROCs”) which can be claimed for electricity generated by offshore wind farms. This rises from 1.5 ROCs per MW exported to 2 ROCs per MW exported for projects which place new orders in 2009/10, and to 1.75 ROCs for those placing new orders in 2010/11. The Treasury estimates that this will generate an additional £525 million of revenue for offshore wind projects over the next 2 years, although it is not clear how this estimate is calculated and the actual figures will clearly depend upon the amount of electricity generated by eligible facilities and the value of ROCs at the point of sale. Additionally, there are detailed project procurement and completion conditions associated with qualification for the uplift which are yet to be clarified.

Combined Heat and Power (CHP)

In order to give certainty going forward to investors in CHP the Budget announces that, subject to receiving state aid approval from the EU, supplies of electricity generated by qualifying CHP plant will continue to enjoy certain exemptions from the Climate Change Levy until 2023, and the other existing levy exemptions for CHP will also be continued.

Carbon Capture and Storage (CCS)

The Budget heralds the creation of a new levy to fund the development of the Carbon Capture and Storage industry. The details of the levy scheme and the intended levels of revenue it is intended to raise are not yet available, but in something of a U-turn the Government hopes to fund up to three new demonstration projects including both pre and post-combustion technologies. There is also a statement of intent to continue with the existing demonstration project competition although this has a tenor which appears to suggest that this project may not get beyond the R&D stage. What is clear, however, is that the companies short-listed in the existing competition will receive £90 million to help them complete their front end design studies provided they are willing to make the completed studies available to the Government.

There are also measures announced to remove fiscal barriers to the re-use of existing offshore oil and gas infrastructure. These offer a potential method of reducing the cost of CCS projects as well as offshore natural gas storage and wind energy projects.

European Investment Bank Lending Scheme

As part of the Budget the Government has also announced a new lending scheme that it has brokered with the European Investment Bank (EIB), at least some of which looks destined for the renewable energy sector. The scheme will make up to £4 billion of loans available to energy projects in the UK. While the details of the intended distribution of this finance is, as yet, unclear, the Government believes some of this funding will be used to bring to fruition a raft of small and medium-sized UK renewables projects, worth around £1 billion, which already have consent..

A further £25 million is earmarked for at least ten de-centralised community heating schemes although it is unclear how this finance will be administered.

Small Scale Renewable and Community Energy

With the aim of developing a supply chain for small-scale renewable energy technologies such as solar power and heat pump systems, £45 million of funding will be made available, primarily in grants to householders, businesses and the public sector through the existing Low-Carbon Buildings Programme. The hope is that this funding will prepare the supply side of the market for the incentives that will be introduced by the impending renewable energy feed-in tariff and Renewable Heat Incentive schemes.

LOW CARBON INDUSTRY/GREEN MANUFACTURING

With the intention of using low-carbon development as a spring-board for the economy, £405 million is allocated to support low-carbon and ‘green tech’ manufacturing. £250 million of the fund will be allocated as part of the new Strategic Investment Fund, with at least some of the rest going out through the BERR administered Environmental Transformation Fund. The aim is to under-pin the existing UK based supply chain and to encourage new investment in it. £250 million of the money will fall under the auspices of BERR, with the remainder going to DECC.

WASTE INFRASTRUCTURE

In a continuation of efforts to divert biodegradable waste from landfill, £310 million of grants are being made available to local authorities to deliver anaerobic digestion and in-vessel composting infrastructure.

To conclude, it is clear that the Government is keen to press on with its plans to stimulate the low carbon economy in the UK notwithstanding the financial crisis being faced in the global economy. The measures set out in the Budget as highlighted above go some way to encourage further investment in the sector and provide a certain degree of stimulus. Certainly, the offshore wind and CHP communities, and the proponents of CCS, have been largely welcoming of the budget measures which, whilst not going quite as far as they would have liked, probably represent the best deal they were going to get in the present economic climate.

What is a little disappointing is the lack of clarity and detail relating to these proposals which will only be revealed in formal consultations and draft legislation, and the timescale for the publication of such proposals is at present unclear. In particular, the proposed CCS “levy” funding mechanism is likely to entail consumers, rather than taxpayers, picking up the cost, and in a similar vein tinkering with the offshore wind banding mechanism is not the same as committing new funding but instead changes the proportional share of the existing subsidy in favour of offshore wind to the possible detriment of other technologies.

Martineau

April 2009