2014 Budget and the UK Energy Sector

John Peters, Managing Director, Engage Consulting takes a closer look at what the 2014 budget means for the UK energy sector
Published: Fri 21 Mar 2014

Brought to you by:


In the budget the Chancellor not only painted a positive outlook for the economy, he included several measures that will impact and support the energy sector – ranging from regulatory policy, to financial incentives for energy intensive industries and a five year £42 million investment plan for the Alan Turing Institute to progress Big Data science - which will no doubt enable the growth of smart energy projects in Britain.

The government promised better regulation for the industry. It stated that it is committed to the UK’s system of independent economic regulation, widely considered to be one of the best in the world. It also welcomed the creation of the UK Regulators’ Network (UKRN), with its focus on key issues including facilitating efficient multi-sector infrastructure investment projects and action on customer engagement and switching in regulated markets. Better regulation should be good news for the industry and citizens, and regulators more working together in a formal relationship will result in better regulation.

There was good news for manufacturers too. Mr Osborne’s announced that Britain will stop annual rises in its carbon tax from 2016, in a bid to limit energy costs for Energy Intensive Industries. The government also extended compensation for the tax for energy intensive industries, at a total of £500 million annually. Whilst the government is keen to create the right conditions to decarbonise the British economy, and reduce emissions by 80% by 2050 (relative to 1990 levels), it needs to be balanced carefully against the impact of policy interventions on energy prices and economic competitiveness.

Ultimately, the government’s goal is to stop – ‘carbon leakage’ – a situation where higher tax levies compel companies in energy intensive industries to relocate to overseas to jurisdictions with lower energy costs, and take with them their carbon emissions, jobs and investment. A big fear is that Energy Intensive Industries will relocate to other parts of Europe driven out by the ‘carbon floor price’ set by the EU Emission Trading Scheme (ETS).

The carbon price floor (CPF) is a tax on fossil fuels used to generate electricity. It came into effect on 1 April 2013 – and it is essentially consists of a “top-up fee” paid to Treasury, set in advance and announced in the annual Budget and it exists to increase the existing EU price of carbon.

Energy companies already pay to pollute under the EU emissions trading scheme (ETS), buying permits to emit greenhouse gases when they generate electricity and the carbon floor price puts a minimum price on how much power generators in the UK pay to pollute. If the ETS price drops below this level, companies pay the difference to the UK Treasury. The carbon price floor was due to increase each year, from around £16 per tonne of carbon dioxide in 2013, to around £70 by 2030.

Since 2011, however, European carbon prices have all but collapsed, meaning that the gap with UK carbon prices has widened, inflating British wholesale power prices. So now Mr Osborne will halt the annual rises in the tax from 2016 until 2020. “I am capping the carbon price support rate at £18 per tonne of CO2 from 2016-17 for the rest of the decade,”. £18 per tonne is the clearly the tipping point for manufacturers – anything over figure would lead to carbon leakage. The Chancellor is right to tread a careful balance between reducing emissions and incentives to keep energy intensive industries in the UK. By protecting these companies - he is helping to ensure that 125,000 jobs remain in Britain too.

Microbusinesses were also given a boost in the budget. The government has agreed with the smart meter Central Delivery Body that they will set out plans for how they will help microbusinesses make full use of smart meters. It also welcomed proposals from the Office of Gas and Electricity Markets (Ofgem) that energy suppliers be required to include more information on current tariffs, new tariffs and consumption details when notifying customers of their contract end dates, and to improve the regulation of energy brokers. The government and Ofgem will work on further ways to make energy markets work better for microbusinesses. The SME Energy Working Group will discuss publication of tariffs.

Lastly, the government’s £42 million investment in the Alan Turing Institute – a national institute will enable the UK to lead the way in, and reap the benefits from, Big Data science – putting it at the forefront of innovation and helping create the right conditions that will enable future smart energy projects to be realised.

John Peters is the managing director of Engage Consulting. He has over 30 years’ experience in the energy industry and an in-depth knowledge and understanding of regulatory structures, commercial frameworks, government policy and global smart developments. Peters was a significant contributor in setting up and operating the UK’s metering, settlements and trading arrangements.