Under the Coalition Government the ‘Green Tax’ delivered renewable energy subsidies that rose to a level that bordered on being out of control and have now been deemed unsustainable. Various reports had stated that the subsidies, if maintained, were expected to reach £9 billion by 2020. George Osborne’s latest move with the Summer Budget has been to abolish this Green Tax because the costs to the British public, through their energy bills, will become an excessive burden.
The problem with subsidised energy, as with any other subsidy system, is the totally false perceptions about the benefits of renewable energy that such subsidies encourage. The developer does not have to recover the full and true cost of the development because the subsidies offset that. But money does not come out of thin air and the government is forced to pass on the costs to the consumer in their energy bills and taxes. In the end the consumer pays more than he would have by simply paying for the true cost of energy. This is because the process of defining, regulating, collecting and distributing subsidies generates a cost that must be added to actual amount of the subsidy given to the developer, which in fact makes the resultant power more expensive than unsubsidised power. Osbourne’s speech declared that the government would remove “unfair subsidies wherever we find them”, but perhaps that would have been better stated as ‘all subsidies’.
The Chancellor also announced that companies and individuals that use renewable energy will no longer be exempt from the climate change levy. The original idea that this levy would encourage the change to renewable resources disappears, so this has now evolved into a simple tax on energy users. The renewable energy companies have complained that this is a loss of revenue, which some claim was as much as 6% of their total revenues. This was probably part of the reason for the drop in share prices for renewable energy companies over the last few days. Unhappy developers have labelled Osbourne’s measures as “unfair” and “punitive”. However, the Treasury advises that removing the exemption will generate £490m during 2015/16, rising to a cost to companies of about £910m in 2020/21.
The cries of foul from the renewable energy sector become more meaningful when you take into account two other measures in the budget, the Carbon Floor Price and oil and gas tax relief. For the former this was noticeable by its absence. This ‘top-up carbon tax’ was frozen in the 2014 budget but was expected to rise through to 2020. Without this rise it is likely that coal will not decrease so rapidly as a contributor to the U.K.’s energy portfolio, denying the clean green message from this government.
The second was that the tax relief for oil and gas operators was expanded, which shows a budget heavily biased towards carbon rich energy sources. But, this tax relief expansion should be understood in light of the severe mauling the oil and gas industry has had over the last 12 months, since OPEC failed to regulate production forcing the price of oil down by over 60%. This has had a severe effect on North Sea oil and gas with thousands laid off, companies retrenching, projects cancelled and even some major offshore support companies going bankrupt.
It was also announced that the duty on fuel would remain frozen instead of as previously promised, go up if oil prices remained below $75 a barrel. This seems to be unfair to renewable energy, but given the state of that industry and the negative impact it is having on British companies and jobs, the government was probably obligated to give that industry some support.
Rounding off the budget for renewable energy companies is a promised review of levies and systems to deal with climate change. A long standing complaint from companies has been that there are too many schemes, all different and confusing. These complaints have resulted in a commitment to review this, under consultation, later this year.
The energy portion of the budget concluded with grand words about climate change commitment to a Global Climate Deal and the promotion of low carbon alternatives, but that seems a little at odds with the actual measures taken and the pledge to “support other priorities”, whatever they may be. Time will tell.
There was however one very important aspect of the renewable energy scenario that was not at all addressed. That is investment for development. The renewable energy sector has the potential to completely replace all carbon based energy generation systems. That, coupled with improving methods of energy storage and conservation, leads to a very clean generation and use of energy that will have a massive and immediate positive effect on the environment. But the development and implementation of these systems requires investment. It requires the innovators to be attractive to investors, and to remove subsidies without implementing alternatives to make renewable energy companies investment attractive, is very short sighted indeed. Let’s hope the reviews promised later this year address that.