Industry welcomes Budget boost for UK low-carbon sector

www.environmental-finance.com
London, 23 April

The UK's 2009 Budget, unveiled yesterday, promises a boost to the development of a low-carbon economy, according to industry groups. Yesterday's announcements, combined with initiatives put forward since last autumn, should enable ￡10.4 billion ($15.1 billion) of investment in the sector, on top of the ￡50 billion from existing policies to 2011, said the government.

"The measures outlined in the Budget are a significant step towards building a clear and credible programme of practical policies that will allow the UK to meet its targets for reducing greenhouse gas [GHG] emissions," said Nicholas Stern, author of the influential Stern Review on climate change. "The additional expenditure ... on renewables, energy efficiency, carbon capture and storage [CCS], and other low-carbon technologies, must be the initial step along the path towards a major structural shift in policy which we trust will follow over the coming decade," he said.

The Budget proposed a review of the Renewables Obligation, which requires electricity suppliers to source an annually increasing percentage of power from renewable sources, with a view to awarding more tradable Renewable Obligation Certificates (ROCs) to offshore wind production. Since 1 April, offshore wind producers are awarded 1.5 ROCs per MW hour (MWh) of electricity produced, but the government is considering increasing this to 2 ROCs/MWh.

This could provide ￡525 million of support to the UK's offshore windfarms, the finance ministry said, the development of which has been hampered by spiralling costs caused by the fall in sterling and tighter financing markets. "This package of measures deserves a welcome from our industry and is in line with proposals that we have been working through with government," said Adam Bruce, chairman of the British Wind Energy Association. "It addresses the short-term economic hurdles we faced due to the fall of the pound against the euro and the post-Lehman collapse in project finance.

"It also restates the government's long-term commitment to the renewable energy sector and should enable us to unlock up to ￡10 billion of private-sector investment in wind and marine energy projects over the coming few years." Industry has also welcomed a further ￡4 billion of support for renewable energy projects to come from the European Investment Bank (EIB), according to the Budget, "through direct lending to energy projects and intermediated lending to banks". "The uplift in the Renewable Obligation and the EIB funding will help bring forward major windfarm and other much needed green energy projects," said Derrick Parkes, an energy tax partner at consultancy KPMG in London.

There are also proposals to fund CCS research and projects, including ￡90 million - of which ￡60 million is from existing transport budgets - to fund "preparatory studies" by those companies involved in the long-running competition for CCS financing. Part of the funding will also come from a levy on consumers - which Ernst & Young said will "pile pressure on [the] government to make sure that CCS projects are delivered on time, to budget and are of direct benefit to the UK consumer".

The government reinforced its commitment to CCS today, with an announcement that all new coal-fired plants are to be built so that CCS equipment can be retrofitted, within five years of the technology being commercially proven. Ed Miliband, Energy and Climate Change Secretary, also announced that the levy outlined in the Budget will be used to finance one post-combustion CCS project and up to three additional projects which could include pre-combustion - an approach previously shunned by the government.

These measures are designed to help the UK meet its GHG emission reduction commitments, which were also formally adopted yesterday. The government announced its first three carbon budgets, each for a five-year period, as mandated under the Climate Change Act adopted last year. As per the recommendations of the Committee on Climate Change, the government is aiming to reduce UK GHG emissions by 34% compared with 1990 levels by 2020 - but this will rise to 42% if a new international climate change deal is agreed.

But the Renewable Energy Association warned that the Budget's provisions do not go far enough to ensure that the UK meets its target to source 15% of its energy from renewables by 2020, as part of a wider EU agreement for renewables to account for an average of 20% of the bloc's energy mix by that date. "We are allocating substantially less to sustainable energy during the global downturn than other countries and this will leave our world class renewables businesses at a competitive disadvantage," added Philip Wolfe, director general of the association.

And Keith Allott, head of climate change at conservation group WWF UK, cited WWF research that shows that the UK is trailing other G20 countries "in terms of the positive environmental action proposed within our fiscal stimulus. Worse, the few positive elements that were present are more than outweighed by the negative initiatives proposed, such as road building. This Budget was an opportunity to redress that balance, yet it appears the government has failed to seize it." However, analysis from HSBC in London shows that, overall, 10.6% of the UK's economic stimulus is being spent fighting climate change, compared with just 5.6% of Japan's. But both are below the global average of 15%.