Spring Budget 2024: From the windfall tax to insulating homes, here’s what the energy sector can expect
Whatever your political sensibilities, this week’s Spring Budget seems to hold more weight than usual.
Prime minister Rishi Sunak and chancellor Jeremy Hunt have, by now, submitted the budget for OBR-approval and the UK counts down until what could well be the last conservative fiscal policy brief for a while is revealed on Wednesday.
For the energy sector, much like education or health, legislative changes take circuitous routes to appearing in the day-to-days of voters.
As such it can be difficult to remain abreast of when political lever-pulling is just that or demonstrable action on policy.
Hunt certainly seemed to be pushing the right buttons in November, delivering an Autumn Statement that played heavily on National Grid upgrades to “unlock” the UK’s business potential.
Let’s take a look at what the energy sector could expect from the chancellor’s Spring Budget in a few days time.
Oil and gas windfall Tax
Hunt and his party know they need cash to fix the crippling NHS infrastructure, boost education and policing infrastructure and deliver on energy upgrades.
Amidst a wider attempt to play down potential tax cuts in recent weeks, the chancellor is reportedly weighing proposals to extend the UK’s 35 per cent profits levy on oil and gas companies, a move also in the Labour party’s playbook, alongside upping the contribution to 38 per cent.
The policy is due to expire in March 2028 but an extra year could raise an additional £1.9bn, based on expectations for the 2027-28 year.
Conveniently enough, it would also fall neatly into the final year of the OBR’s five-year forecast by which point UK debt must be falling.
But to date, the tax has returned less than hoped for – around £6bn since it was introduced in May 2022.
Halting the windfall tax would cut the overall tax rate on energy firms from 75 per cent to 40 per cent.
Labour’s plans to up the tax could cost the industry up to 100,000 jobs and around £20bn in lost revenues, investment bank Stifel has warned.
The future of UK oil and gas production is already written, but the speed at which Westminster will transition away from fossil fuels will be vital to the success and survival of the industry.
As such, the tax extension is a notable bellwether on the view the government is taking on the energy transition and the sector will look for clarity as soon as possible on the issue.
Contracts for Difference
After the bid-less disaster that was offshore wind auction round five last year, there simply needs to be more budget to allow for inflationary costs.
Assumptions for reference prices, however, continue to be considerably lower than views of industry, and load factors are also significantly higher, especially for offshore wind.
With the right conditions set by government, investment can boost UK offshore wind towards the lofty target of 50GW by 2030 but it’ll be a tight balancing act given the high costs still swirling around the sector.
Emissions Trading Scheme (ETS)
As complex and acronym-laden as the ETS is, the problem is clear – the EU and the UK are not offering enough financial incentive for companies to sell their emissions.
Alongside poor seasonal demand, the continent’s clean energy grid is growing fast so carbon permits are less in demand and therefore the price is rubbish.
Energy UK estimates that if the UK-EU carbon pricing dynamics remain the same, British companies will have to pay over half a billion pounds per year into EU coffers simply to export to Europe from 2026.
Home efficiency
Whilst Europe appears to be moving out of the worst of the energy crisis from the last two years, there remains a significant swathe of the UK facing the compounding issues of cost of living and energy crises.
And, though the UK’s electricity and gas watchdog recently lowered the energy price cap for consumers to the lowest level in two years, its chief executive said he knows there are still “big issues to face”.
The government still hasn’t implemented the comprehensive support mechanism for vulnerable customers that was promised from April 2024.
Energy groups say the taxpayer-funded policy would enable suppliers not to become “arbiters”.
The UK also still has some of the leakiest homes in Europe, with billions of pounds wasted through failed insulation and the energy efficiency audit promised in Powering Up Britain would be welcomed by the sector.
Other matters that will be worth keeping an eye out for in ‘Spring Budget Bingo’ are the awaited Energy Bills Discount Scheme (EBDS) due to end on the 31st March with no extension in sight and further details on energy efficiency incentives after the death of the Energy Efficiency Taskforce amidst a net zero policy rollback.