A depressing Autumn Statement introduces new taxes and cuts consumer support

Yesterday the new Chancellor. Jeremy Hunt, issued a new Budget for the UK in his Autumn Statement, reversing most of the policies in the Truss/Kwarteng Growth Plan. The Statement heralds significant tax increases for just about everyone, with several announcements relating to the energy sector.

Energy Price Guarantee is extended but at lower levels of support

Despite indicating less than a month ago that the EPG would be limited after April next year and would be targeted at the most vulnerable, yesterday it was announced that it would remain universal, but that the support level would be reduced by £500, meaning that households will see their energy bills capped at an annualised average level of £2,500 until April 2023 and £3,000 for the following year. This may be reviewed if the costs increase as a result of higher wholesale energy prices and the Government is planning to consult on restricting the amount of energy the support applies to so that profligate users do not benefit unduly. Suitable exemptions for people who have high energy usage as a result of a need to power medical devices would be applied. In addition, support for homes using alternative fuels (eg LPG, heating oil) will double to £200, and similar support will be available to households in Northern Ireland.

“Changes to the Energy Price Guarantee mean that the breathing space for households struggling with energy costs will now be shorter lived and less helpful. An average bill of £3,000 from spring is an increase of 40% from current record levels given that the Government has ceased the support currently provided by the Energy Bill Support Scheme, yet energy bills are up by a staggering 130%. Sadly, this means there is now no end in sight to the energy crisis for struggling households. For most, it looks as if it will get even harder…we have to recognise energy prices will remain high for some years. We can’t keep stumbling forward with short-term, ad hoc responses. The Government and regulator, working with industry and consumer groups, need to get on with the job of designing and implementing a robust social tariff that provides greater protection for the most vulnerable,”
– Adam Scorer, CEO National Energy Action

The Government also intends to develop a “new approach” to consumer protection in the energy market, which will apply from April 2024 onwards. It will work with consumer groups and industry to determine the best approach, including exploring options such as a social tariff. This is potentially significant – there has been much criticism of Ofgem’s approach to retail energy regulation, and of the Government’s obsession with competition as being the key determinant of a well-functioning retail market.

However, the adjustments to the EPG will make life difficult for households already struggling with fuel poverty, and it is difficult to justify the provision of universal support when some households are in much greater need than others. Universal support was appropriate for a measure that was introduced at short notice, but it should have bought time for a more targeted approach to support low income households and those whose energy usage is high due to medical needs. While there is an additional £900 being made available in benefits to vulnerable households, there was an opportunity to reduce energy costs for those on the lowest incomes while withdrawing support for the wealthy. An intermediate level of support could have been provided for middle-income households, possibly limited to winter months. This may also have reduced the overall cost of the scheme.

An announcement on the further support for businesses following the expiry of the current scheme in April 2023 is due on 31 December.

Expansion of the Energy Profits Levy

The Energy Profits Levy on oil and gas producers is to be extended to March 2028 with the rate increasing from 25% to 35% from 1 January. The investment allowance will be reduced to 29% for all investment expenditure other than decarbonisation expenditure which will continue to qualify for the current investment allowance rate of 80%. Following these changes, the Energy Profits Levy is expected to raise over £40 billion over the next 6 years.

Harbour Energy, the largest oil and gas producer in the North Sea, confirmed it is “reviewing the impact” on its business from “yet another change in the tax regime for UK oil and gas companies.”

“The levy, as currently designed, disproportionately impacts independent UK oil and gas companies and does not target genuine windfall profits,”
Harbour Energy spokesperson

I have some sympathy with this position. At a time when the UK needs to maximise its domestic production, it should create incentives for new exploration activity in the North Sea. That means maintaining the investment allowances. The North Sea is an increasingly difficult environment for technical reasons – the geology of unexploited reserves is challenging and development costs are higher. Increasing taxes on North Sea production only incentivises producers to focus on reserves elsewhere in the world. This is a short-sighted move which will undermine the Government’s stated objective of increasing domestic production.

New taxes for low carbon electricity generation

The biggest news in the Autumn Statement was the announcement of a new Electricity Generator Levy is being introduced from 1 January on low carbon generation including nuclear, renewable and biomass sources. This revenue levy will apply to revenues above £75 /MWh on companies whose output during the relevant period is greater than 100 GWh per annum, subject to a revenue allowance of £10 million.

“…some electricity generators in the UK are realising extraordinary returns; from being able to sell electricity at a price that has been inflated by costs to which they are not exposed; and a price that then well exceeds the price needed to provide investors with a reasonable return on the costs of production and exceeds any reasonable expectation of prices when capital was invested. These extraordinary returns are then being realised at a cost to customers through the substantial increase in the amount that households, businesses and other customers are being required to pay for their energy needs,”
– HM Treasury, Electricity Generator Levy Technical Note

The Levy will apply to corporate groups or standalone companies, that generate electricity in the UK and are either connected to a national grid or local distribution networks, and is expected to raise £14.2 billion over the forecast between 2023 and 2028. The Levy will not be deductible from profits subject to Corporation Tax.

The Levy will not apply to gas generators since their gas input costs have risen significantly meaning they are not earning excess profits as a result of higher electricity prices. It will also not apply to pumped storage or battery storage, as the Government considers the application of the Levy to these business models would be inappropriate and create unfair outcomes or undue distortions to decision making and dispatch. Nor will the Levy apply to coal or oil generation which make up a very small and declining proportion of UK generation, are reliant on fuel inputs whose costs are volatile and/or have risen significantly in response to the Russian invasion of Ukraine. The Government believes they serve a “unique function ensuring the resilience of the UK market, often providing back-up power under special contract with the National Grid”.

Predictably, companies with large renewables portfolios have reacted with anger, particularly at the exclusion of gas-fired generation from the Levy (which is ridiculous since gas generators are not making exceptional profits, nor are they in receipt of the extremely generous Renewables Obligation subsidy).

“This windfall tax on low carbon power risks deterring investment, at a time when the chancellor should be incentivising clean energy. Unlike in oil and gas, under this levy companies which are making significant investments in renewables will get no tax relief and will be hit by a higher windfall rate,”
– Dan Mc Grail, CEO of RenewableUK

In my view, these complaints are disingenuous, and the only group that could legitimately complain is EDF in respect of its nuclear portfolio – at a time when the company is exploring life extensions of its aging reactors, it needs incentives for the necessary investments which are essential to Britain’s energy security for the rest of this decade. But as far as renewables generators are concerned, they ARE earning unjustified excess profits at the same time as benefitting from an excessively generous subsidy scheme. A revenue tax means that generators selling under legacy fixed price PPAs will not be unduly penalised if the price is at historic norms.

Introducing road taxes on electric vehicles

Currently, electric cars and vans do not pay “car tax” (officially known as Vehicle Excise Duty (“VED”)). This was to encourage people to replace conventional petrol and diesel cars with electric cars, however, as the numbers of electric cars increase, the tax income from vehicles has been declining. So it was inevitable that at some point electric cars would be required to pay VED, and this is now being announced in the Autumn Statement. From April 2025 they will be liable for the tax:

• new zero emission cars registered on or after 1 April 2025 will pay £10 in the first year, and the standard rate of £165 a year thereafter
• zero emission cars first registered between 1 April 2017 and 31 March 2025 will pay the standard rate
• the exemption to the Expensive Car Supplement for cars with a list price exceeding £40,000 for electric cars is due to end in 2025. New cars registered after 1 April 2025 will now be liable for the expensive car supplement for 5 years from registration
• zero and low emission cars first registered between 1 March 2001 and 30 March 2017 currently in Band A will move to the Band B rate, currently £20 a year
• zero emission vans will move to the rate for petrol and diesel light goods vehicles, currently £290 a year for most vans
• zero emission motorcycles and tricycles will move to the rate for the smallest engine size, currently £22 a year
• rates for Alternative Fuel Vehicles and hybrids will also be equalised.

Finally looking at reducing energy waste

The Government has announced a new “Energy Efficiency Taskforce” – a “long-term commitment to drive improvements in energy efficiency to bring down bills for households, businesses and the public sector” with an ambition to reduce the UK’s final energy consumption from buildings and industry by 15% by 2030 against 2021 levels. New funding a £6 billion will be made available from 2025 to 2028, in addition to the £6.6 billion provided in this Parliament.

The move has been cautiously welcomed, while recognising that previous attempts to cut energy waste include the much-criticised Green Homes Grant, a rushed £1.5 billion scheme which was scrapped less than a year after launch due to a shortage of trained installers and overall poor scheme design.

“The taskforce announced today to oversee these vital changes must learn from past failures and build a competent, skilled supply chain. As an institute and profession, we will continue to engage with, and wherever possible support the government, as it drives forward the vital programmes of work to retrofit our building stock. Time is of the essence,”
– Simon Allford, president of the Royal Institute of British Architects (RIBA)

Reducing energy waste from buildings is an important step in the energy transition, meeting all three objectives of the energy trilemma: security of supply, affordability and sustainability. Hopefully the Taskforce will take the time to consider how to do this effectively after many stalled attempts. A really important pre-requisite is to reform the Energy Performance Certificate (“EPC”) so that it measures heat losses. The current system is too subjective, and ignores the condition and quality of construction materials used – having smashed up windows makes no difference to the EPC, so repairing smashed up windows carries no EPC benefit.

Research is also needed to determine which measures would be most effective for different types of buildings. A study carried out in 2017 by the University of Bath indicated that building modellers were no better than the “man in the street” at determining which measures would have the largest impact on a building’s energy costs – this needs to change. It is also important that building designers and developers are accountable for the energy performance of buildings to eliminate the so-called “Performance Gap” where buildings can use 10 times more energy in use than was anticipated in the design stage.

“It’s a serious scandal. It affects all new buildings as well as the refurbishment of older ones. When one school in Plymouth was rebuilt, the energy bills for a month ended up costing the same as for an entire year in the old 1950s building. The problem is nobody checks that the building is performing as promised. There is very little regulation. They can’t be sued. It’s like a surgeon not being bothered about whether their patient lived or died,”
– David Coley, Professor of Low Carbon Design, University of Bath

If energy waste from buildings is to be conclusively addressed, it is essential that heat losses and energy usage is actually measured as part of the EPC, and that standards for new buildings are developed and enforced, with designers and developers being legally accountable for energy performance outcomes.

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Overall, the Autumn Statement is a mixed bag for energy: the windfall tax on low carbon electricity generators is broadly positive except for the inclusion of nuclear power, as is the introduction of VED on electric cars. The new funding for reducing energy waste is also welcome although it may be inadequate. However, the expansion of the windfall tax on oil and gas producers is likely to be counterproductive.

The adjustment to the Energy Price Guarantee is also a missed opportunity. Vulnerable households will continue to struggle with affordability, and there are real concerns over the impact of fuel poverty this winter and next. Hopefully the Government will make progress with its reforms of retail market regulation and introduce a social tariff to replace the price cap.

“Just as the world sinks into a global downturn, we are going to help it on its way with a completely unclever application of procyclical macroeconomic policy. Our pursuit of deeper thinkers among policymakers constantly fails to materialise. Perhaps we had one of these in Kwasi Kwarteng but he needed better PR advisers,”
– Stephen Thomas, Professor of Finance at Bayes Business School

More broadly, the Autumn Statement is profoundly depressing.