Autumn Budget 2018: Implications for the Energy sector

Autumn Budget 2018: Implications for the Energy sector

KPMG assess the implications of the Autumn Budget 2018 on the Energy sector


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Autumn Budget: Energy - Roads and forest

Carbon Price

The Budget confirmed the level of the Carbon Price Support (CPS) at £18/tonne for 2020-21.  

However, the longer term outlook for carbon prices in the GB energy market remains shrouded in uncertainty. 

A year ago, in the 2017 Budget, the Government said that it thought a ‘total carbon price’ (ie the CPS plus the price of carbon from the EU Emissions Trading Scheme (EU ETS)) of around £25/tonne was the “right level” until all the unabated coal was off the system.  In recent months, EU ETS prices have firmed up to over €20/tonne, generating a total carbon price well over £30/tonne (see chart), well above the “right” level the Government announced last year.

Carbon price graph

The Budget did not confirm the rate of the CPS for 2021-22.  Instead, it said that the Government would seek to reduce the level of the CPS if the total carbon price remains high.  No further details were given, but this statement would seem to imply that the Government is still targeting a total carbon price of around £25/tonne in the short term. 

The Government has also made clear its plans if we leave the European Union without a deal next March.  Following on from the recent ‘no deal’ notices, the Budget announced that in a ‘no deal’ scenario, a new ‘Carbon Emissions Tax’ of £16/tonne would be introduced from 1 April 2019.   The detailed consultation document states that the CPS will remain in place in a no deal scenario. 

The Budget was silent on whether the UK would remain in the EU ETS after 2020 (the end of Phase 3) if a deal with the EU is reached. It just reiterates that the Government is looking at all options for longer-term carbon pricing, including staying in the EU ETS, establishing a UK ETS, or a wider carbon tax. 

This poses a significant challenge for investors in the GB power system.  Energy investments are long-term in nature.  Investors in gas, renewables and nuclear will be left guessing as to what carbon prices to assume post 2020 as they bid into upcoming Capacity Market and Contract for Difference auctions.

A clear carbon price signal is essential if the UK is to continue to meet its decarbonisation goals and for the Government to meet its Industrial Strategy ambition of the UK leading the way on ‘Clean Growth’. Investors will need answers soon on some of these outstanding questions if confidence in investments in the GB power sector and the transition to a lower carbon power sector is to be maintained.

Business energy efficiency

The Budget announced up to £315m for a new Industrial Energy Transformation Fund, aimed at supporting large energy users to reduce their energy bills. It also announced a new business energy efficiency scheme, focused on smaller businesses. It indicated that further details would follow.

This new funding will be welcome news to those businesses seeking to reduce their bills.  However, they do come just a few years after the Government sought to reduce the complexity of the various business energy efficiency schemes already in place.

Surprise increases to tax relief for capital expenditure 

A new ‘permanent capital allowance’ for investments in non-residential structures and buildings has been announced worth close to £2bn in tax relief. The new Structures and Buildings Allowance (SBA) will be available for eligible construction costs incurred on or after 29 October 2018 at an annual rate of 2% on a straight line basis. The SBA will provide tax relief for the costs of physically constructing new structures and buildings intended for commercial use. Qualifying costs will include the work to bring them into existence, the improvement of existing structures and buildings, the cost of converting existing premises for use in a qualifying activity, demolition or necessary land alterations. The SBA will be available for offices, retail and wholesale premises, walls, bridges, tunnels, factories and warehouses. This will be particularly welcome for the power and utilities sector who have suffered from a lack of tax relief for this type of expenditure since the Industrial Buildings Allowance was abolished in 2007.

The Annual Investment Allowance, which gives full relief for eligible capital expenditure in the year incurred, has been raised from £200k to £1m for two years.  This will rapidly increase the timing of relief, and in light of the reducing corporation tax rate, the overall quantum of relief. The AIA will not be available for SBA expenditure.

The benefits of these two announcements will be in part offset for large taxpayers by the following: a reduction in the rate of relief for long life assets (those with a useful economic life of 25 years or less) from 8% to 6%; ending Enhanced Capital Allowances (ECAs) and First Year Tax Credits for energy saving technologies from April 2020. ECAs for electric vehicle charge points will be extend to 31 March 2023.

Off payroll workers – compliance burden shifting to companies

As expected the government is to reform the operation of the anti avoidance rules (known as IR35) that target off payroll workers in the private sector by shifting the responsibility for compliance to the company that engages the contractor. If a working arrangement would, absent the use of a Personal Service Company (PSC), give rise to an employment relationship the company paying the fees has to treat it as such, operating PAYE and, critically, paying employer’s national insurance on the amounts paid to the contractor. The new compliance requirements will apply from April 2020. 

Oil and gas measures – support for late life assets and decommissioning 

Following the publication of draft legislation in the summer and a period of consultation, the Government has today confirmed that Transferable Tax History (TTH) will be introduced to allow companies selling North Sea oil fields to transfer tax payment history to the buyer.  Losses arising from offshore decommissioning expenditure can be carried back against ring fence trading profits back to April 2002. That relief is capped at the amount of tax paid by that company. Since new entrants do not have a tax payment history against which they can carry back future losses on decommissioning, this created a fiscal barrier which prevented assets from changing hands. TTHs are designed to allow a transfer of tax payment history on the sale of the oil field. TTH will allow a seller of an interest in an oil licence to transfer an elected amount of its tax history to the buyer of the field. The buyer will then be able to set the decommissioning cost of the field against the TTH.

Government have also announced an intention to strengthening the UK’s offshore decommissioning industry. A call for evidence will be launched to identify what more should be done to “further strengthen Scotland and the UK’s position as a global hub for decommissioning”.  

Changes to Climate change levy (CCL) rates 

CCL rates for 2020-21 and 2021-22 are to be amended. Government is continuing with the commitment to rebalance the rates for gas and electricity. The electricity rate will be lowered and the gas rate will increase such that it reaches 60% of the electricity main rate by 2021-22. Other fuels, such as coal, will align with the gas rate.     


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