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UK budget 2011 – upping carbon price and Green Investment Bank

The UK budget for 2011 has been released setting a floor price for carbon and upping the initial capitalisation of the Green Investment Bank. Although largely welcomed by the industry, some point out that it could be too little, too late.

By Renewable Energy Focus staff

The floor to the carbon price for electricity generation will start at around £16 per tonne of CO2 from April 2013, and be increased towards £30 per tonne in 2020.

The Department of Energy and Climate Change (DECC) has also upped the initial capitalisation of the Green Investment Bank to £3 billion. It will begin operation in 2012/13, and will have borrowing powers from 2015/16 – and once the target for debt to be falling as a percentage of GDP has been met.

Energy and Climate Change Secretary Chris Huhne, says: “There’s a clear, long-term signal to energy investors in today’s Budget. A Green Investment Bank with substantially more capital and borrowing capacity and a stronger, more stable carbon price put investment in green energy technologies at the heart of the coalition’s strategy for sustainable, balanced economic growth.”

RenewableUK – Positive for planning

RenewableUK says the Budget contains several policies that could encourage long term sector growth, but that further refinement and action will be needed.

In particular, the association says the measures on planning are positive for renewable energy. The measures include a 12 month deadline for decisions, which could have a positive impact on onshore wind farms. However, the term ‘sustainable development’ needs closer definition.

RenewableUK also “warmly welcomed” the trebling of the funds for the Green Investment Bank and the new start-up date of 2012.

Gordon Edge, RenewableUK Policy Director, says: “The Government made the right decision to set up the GIB as a bank, rather than a fund, with the powers to borrow money post 2015. The fact that the GIB funds will be underwritten by the Treasury shows Government commitment to attracting long-term investment.”

Commenting on the carbon floor price, RenewableUK believes that a longer-term indication of post 2020 levels is needed, and that the Government should commit to reinvest proceeds in low-carbon transition programmes and green energy R&D.

Edge concludes: “Today’s details on the carbon floor price and the GIB should be the first step towards a long-term solution on funding for a host of technologies such as the next generation of offshore wind farms and wave and tidal devices. We would encourage more clarity and further action following today’s budget, as the measures so far look promising.”

KPMG – Good for nuclear…

Andy Cox, Energy Partner at KPMG says the carbon floor price could help nuclear build-out in the UK: “The private sector which is being asked to fully fund billions of investment to get new nuclear built and set the UK firmly on the road to low-carbon energy generation will be pleased with today’s announcement.”

He adds: “Beyond nuclear, the carbon price floor also has an impact on other forms of energy generation. This announcement certainly feels weighted towards building new nuclear and will put upward pressure on prices. In coal, for example, our analysis shows that at a carbon price floor above £25, coal starts to look difficult. Of course, the knock on impact of this policy change on investment into other technologies – such as offshore wind – remains unclear and will be better understood once the conclusions of the wider energy market reform are announced later this year.”

KPMG also criticise the Green Investment Bank for not being enough to bring certainty to investors. Vincent Neate, KPMG’s Head of Climate Change & Sustainability, says: “The earlier start and extra funding for the Green Investment Bank is very welcome but it is not entirely clear what the Government is aiming to achieve; is it subsidised investing in otherwise uneconomic projects or a necessary intervention that will nevertheless generate a return?

“The market is looking for mechanisms to invest, more than for funding itself, lack of which isn’t the key issue when it comes to low-carbon project development. The real challenge is making ‘green’ investment relatively more attractive to increase the appetite for it, altering standard investment models.

“So robust incentives on the back of the Green Investment Bank would be a valuable additional measure for moving the UK towards meeting its renewable energy targets, which a further £2bn of funding is unlikely to greatly influence given the scale of the investment required,” Neate concludes.

Climate Change Capital – An achievement in current climate

With the current economic climate, Climate Change Capital believes the £3bn promise for the Green Investment Bank is an achievement.

Vice Chairman, James Cameron, says: “In the current fiscal environment committing £3bn is an achievement and by allowing the GIB to borrow mid-decade, its lending can ramp up quickly when the country’s low-carbon capital requirements reach a critical point. But, this mustn’t be a question of ‘fire and forget’. It is also important that as the Bank develops, its capital base is regularly reinforced with pollution permit auction proceeds and newly announced UK carbon tax revenues.”

Rupert Edwards, Head of Research and Market Analysis at Climate Change Capital, adds: “The UK Government’s carbon price floor proposals demonstrate that the UK has the ambition to take a leadership role on climate policy at a time when the EU as a whole seems to be losing its nerve. Investors will, however, have serious doubts about the long-term credibility of the carbon price floor policy as it is currently conceived. This is because it is a tax-based mechanism subject to annual votes in Parliament.

“A policy to reduce uncertainty must itself be certain. To ensure that certainty a contractual obligation could be created with no costs to Government if the Treasury keeps to its carbon price floor commitments. If the carbon price support was actually guaranteed, it would increase certainty, reduce the incentive for investors to ‘wait and see’, and lower costs for investors and the economy.”

Good Energy – Still need FiT and ROCs

Good Energy says the tax breaks for microgeneration equipment is a positive, but that a good feed-in tariff and a continuation of the Renewable Obligation Credits (ROCs) is important for the renewable energy industry.

CEO Juliet Davenport, says: “In introducing a new cost framework for schemes like the feed-in tariffs, we’re disappointed that the Treasury has taken the view that those schemes are a burden to the consumer; FiTs are a great way of helping families and businesses reduce their electricity bills by giving them more control of their energy use. Whatever framework the Government is now proposing should take this into account.”

On the Green Investment Bank, she says: “It’s good to hear that the Green Investment Bank will be a proper bank, rather than just another body dishing out funding. But whilst everyone is talking about how it will finance bigger projects, it’s vital that it supports smaller energy schemes too – the Government needs to do a lot more to encourage decentralised energy if it’s going to hit its 2020 renewables targets, and so the GIB needs to make sure that borrowing costs for households and communities will be lower.”

She concludes: “The announcement of a carbon price floor should underpin the renewables sector but it won’t do much [to] drive new investment, which will still be reliant on FiT and ROCs.”

Utilyx – A long way to go

Andrew Horstead, Risk Analyst at energy and carbon management company Utilyx, says the Budget is a missed opportunity: “The Government continues to promise that it will be the greenest ever, but there is still a long way to go if the steps announced in today’s Budget are to have any real impact. We feel it is a missed opportunity.”

He says a carbon floor price from 2014 is not soon enough to “stimulate the sort of investment that is required”. He also says the price level is too low to discourage coal burning, but high enough to impact energy bills.

On the Green Investment Bank, Horstead says: “Creating a Bank that cannot borrow for five years seems to be missing the point. More than anything, this is sending out the wrong signals and actually putting UK investors on the back foot rather than helping to support the enormous green investment required over the coming decade.”

Siemens – Positive

Siemens UK believes the Budget is positive for investment in the UK. Andreas J Gross, Chief Executive at Siemens Plc, says: “Siemens is very pleased that the Chancellor has announced an additional £2bn of capital funding (to a maximum of £3bn) for the Green Investment Bank and accelerated its implementation to 2012. This should put the Bank on a secure footing, giving access to finance that is essential for the deployment of low-carbon infrastructure projects.”

Jurgen Mayer, Managing Director, Siemens Industry Sector, adds: “Siemens welcomes the steps taken in the 2011 Budget to encourage investment within the manufacturing sector in new plant and machinery. Doubling the limit on capital allowances from four years to 8 years should help UK manufacturers invest to increase productivity and encourages the growth needed for the UK to maintain a competitive position in the global market.”

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