Budget 2016 Fails to Stem Energy Sector Uncertainty

Budget 2016 Fails to Stem Energy Sector Uncertainty

The Government has spurned a chance to secure thousands of jobs and billions of pounds in North East investment leaving jobs in energy and manufacturing industries dangerously exposed.

Investors in sectors as varied as carbon capture and storage (CCS), offshore wind and solar have been at pains to point out the damaging effects of government policy as support for key technologies has been axed.

Mark Stephenson, Head of Public Affairs for Invicta Public Affairs said:

“The government has recently cut support for carbon capture and storage as well as a range of renewables technologies. Not only will this push up bills and stifle investment in renewables, it will endanger jobs in energy intensive industries in areas such as the North East.”

“CCS for example could lower industrial emissions by as much as 90% and support many thousands of jobs. Offshore we have the opportunity to invest in wind farms such as Dogger Bank but policy uncertainty has now cost the North East and Humber over £2bn in investment and over 70,000 jobs owing to the downsizing of investment pipelines.

“The Government must understand that there are areas of the country which want and need energy as well as development, the North East is one of those areas.

“Unfortunately 2015 saw the brutal reality of what happens when uncertainty in government policy and poor market conditions collide. It is a huge injustice to those who lost jobs at the likes of SSI that these lessons haven’t been learned.

“It is not just energy generators which are set to suffer. Businesses across a range of sectors rely on local investment to grow and create job opportunities. Our manufacturers, transport and logistics businesses including our two biggest ports on the Tees and Tyne stand to gain hugely if the government can plan further ahead and provide sufficient policy stability that investors aren’t pushed out of the UK market.

“It is important now that the government looks ahead and takes action to reassure investors and employment in these key areas of our economy.”

Devolution. The Northern Powerhouse. Just what is George Osborne really up to?

Devolution. The Northern Powerhouse. Just what is George Osborne really up to?

Anyone with their eyes and ears open recently will observe that devolution is all the rage in political circles at the moment. But there is a very real danger of the grand rhetoric not matching up to real action and outcomes on the ground. There are reasons for this, many of them inanely political and the challenge for businesses and others is to ensure that they not only have a voice in this debate but also sufficient political leverage to make that voice matter.

Successive governments have, over several decades, moved investment in public sector jobs around the UK in an effort to rebalance, in particular between the north and the south. However this has all too often amounted to little more than a shuffling of deck chairs and there has perhaps never been a concerted push to move powers out of Whitehall to the regions of the UK – notwithstanding the evolving settlements for Scotland, Wales and Northern Ireland.

In recent times this has begun to change.  At first the Conservative contingent within the coalition government of 2010-2015 talked of the ‘Big Society’. This was in part about reducing the extent of government centralisation but also asking the public, voluntary and business sectors to take more of a role in public service provision. Some commentators viewed this as an attack on the welfare state, others as an overdue rationalisation of a leviathan. In any event the Big Society was largely ridiculed for its lack of definition and as a result it was quietly put out to pasture during the early days of the 2010-15 parliament.

big society

                                      David Cameron – The Big Society

Enter stage left ‘the Northern Powerhouse’. During 2013/14 the Chancellor and associates such as (the now) Lord Jim O’Neil were looking at ways to grow the northern economy. Substantial research had already been carried out in this area by organisations such as the Institute for Public Policy Research, Centre for Cities and the Northern Way, the Northern Economic Futures Commission (NEFC – 2012) and others.

A Centre for Cities analysis of UK growth in 2015 demonstrated the need for economic rebalancing and growth in the constituent regions of the northern powerhouse. In 2013 the northern powerhouse made up just 13.3% of Gross Value Added (GVA) in the UK compared to London’s 24.5% which has grown twice as fast as GVA in northern economies over the last 10 years.

The NEFC 2012 study evaluated the challenges and the opportunities involved in growing the northern economy and how policy, in areas such as infrastructure investment for instance, could be used to address both. The report highlighted the disproportionately low levels of government investment in the north’s transport infrastructure to date in relation to both London and in comparison with other European city-regions.

Analysis conducted by the IPPR in 2015 into ‘Transport for the North’ points to the economic benefits associated with infrastructure investment and cites the Northern Hub programme, Rail North and One North strategies as key projects for delivery. The Northern Hub strategy, a programme of targeted upgrades to railways is projected to bring benefits to the value of £2.1 billion per annum by 2021. The GVA impact of delivering the Rail North project, a strategy for the management of the Northern and TransPennine Express franchises is said to be near £900 million per annum.

The ideas took hold in part because of the backing of the Liberal Democrat half of the coalition. The Chancellor noticed and sniffed an opportunity and since then the politics has never been too far away. We have moved from defining a vast opportunity to invest in the northern economy to ministers predicating investment on local government acceptance of a mayoral model. Devolution and the northern powerhouse thus became irrevocably coupled and the project to reinvigorate the north has subsequently lost some momentum as negotiations in some areas stall.

Cynicism aside, there are clear political incentives for the government. Investment in the north is a vote winner, if only in particular areas. The insistence upon a mayoral system also has its strategic benefits when viewed from Conservative Party HQ. The push in this direction will disrupt local politics and in some instances perhaps loosen the decades old dominance of individual political parties on councils across the north – namely in traditionally Labour areas.

And so we return to whence we came – the Big Society. Before messrs Cameron, Letwin, Osborne and Clarke ever got the keys to Downing Street they were clear on their vision for the role of the state in modern British life. Successive visits to the US during the nineties and noughties to look at the US mayoral system, crime commissioners and ideas of federalisation rubbed off on them and influenced their plans for changing Britain should they get their chance. In 2015 they did.

Their ideas are coming to fruition. The Big Society started, stuttered, but ultimately was the victim of both coalition politics as well as a lack of effective communication to an identifiable audience. The genius of the northern powerhouse is that it has an audience hooked with the promise of the sunlit uplands of major investment and growth.

For businesses and others concerned, shaping how investment is delivered and the sectors that benefit is vital, yet relatively simple. The areas with the strongest leadership and resource will ultimately be able to shout the loudest, which will in many instances be enough. However, this will be dependent upon the acceptance of a new type of settlement for governing localities and regions of the UK – namely mayoral deals.

The government has been clear that it will hand powers to areas open to cooperating with the mayoral system. This will earmark nothing short of a period of constitutional change posing as economic policy that serves to benefit the Conservative Party. Taken alongside changes to constituency boundaries which will ultimately reduce the number of traditional Labour Party seats, changes to party funding rules which will lower Trade Union contributions and moves to reduce the power of the House of Lords the government is looking to shape the political landscape to its advantage.

Devolution is clearly necessary. Likewise, economic rebalancing vis-a-vis the northern powerhouse is also necessary. However we must not underestimate the ambition the government has to reduce the size and role of the state while improving its future odds of remaining in power. Whether the result of this is good for the north remains to be seen and with Her Majesty’s opposition seemingly in absentia the political cards are hardly stacked in our favour. Consider yourself warned.

Brexit – What Might the Risks Look Like in the Event of an Out Vote?

Brexit – What Might the Risks Look Like in the Event of an Out Vote?

Unless you’ve had your head in the sand in recent weeks you’ll have noticed an awful lot of fuss about the EU Referendum which has been scheduled to take place on 23 June 2016. Whether one views the forthcoming plebiscite as a victory for democracy or merely the result of an internal Conservative Party feud, there is no doubting the fact that its impact could be world changing.

We’ve heard of the risks, the need for change and there’s no shortage of hyperbole (see above). But what would a Brexit look like and what would it mean on the ground from 24 June onwards?

The Economy

It is difficult to deny that the immediate impact would not be positive. Markets don’t like uncertainty and a brexit vote would mean lots of that. Sterling would likely fall against both the dollar and the euro as more conservative (note the small ‘c’) investors hedge against a possibly weakened economy. It would be up to UK policy makers to attract them back but in the interim (a possible 4 years of renegotiation) weakened sterling would mean higher costs on things as varied as food, fuel and debt.

What would this mean? Well for starters the debt repayments that Her Majesty’s Treasury makes would increase in size substantially – likewise any variable rate mortgages. This could affect the credit rating of UK Plc and the average taxpayer. Added to this the rise in the cost of living would likely mean a cutback in consumer spending, lower tax receipts from VAT and corporation tax and therefore a significant headache for George Osborne come his next budget. Further cuts across the board for government spending would be almost inevitable.

For exporters, especially foreign owned manufacturers, investment decisions would be parked en-masse.  While increased tariffs would be likely they would take time to materialise therefore it would be the sentiment of boards rather than increased costs that would have the most immediate impact. In short fewer eggs would be placed in the UK basket by way of foreign direct investment – a drop of over 6% according to some estimates.

Politics

The Conservative Party will remain split. Boris Johnson is gambling his immediate future on the UK leaving and the Prime Minister not surviving a great deal of time beyond this. Should this happen Cameron would likely announce his intention to leave giving time for a leadership contest either by the Conservative Party conference in October or immediately following it. Either way this would mean added uncertainty bringing more economic ‘unease’.

The Labour Party meanwhile will still be figuring out how to get rid of Jeremy Corbyn. It is unlikely this will have developed much and the side-show would thus rumble on with the familiar thunder-faced front bench flanking Mr Corbyn every Wednesday. If nothing else their opposition might not look quite so smug and some of the shadow front bench might have had ‘a good referendum’.  Note that Hillary Benn has refused to share a platform with the Prime Minister – perhaps he sees photographs coming back to haunt him from his left flank some time in the not so distant future?

The biggest political uncertainty following a Brexit lays north of the border in Scotland. The First Minister Nicola Sturgeon and former First Minister Alex Salmond have made clear their intention to push for a fresh independence referendum should the UK vote for brexit. They would not pause for thought in pursuing this objective.

Much of the above is pretty bleak and yet very difficult in the round to contend. In the longer term the outers may be correct. The UK may take full advantage of a newly found economic and policy agility by forging ahead in the big wide world. Whether or not the warm blanket of sovereignty (itself a relative term) would soothe the ease of Britannia remains to be seen. The outers are yet to produce a thesis for what ‘out’ actually looks like.

The retention of a £13bn annual payment would help fund certain projects. Nevertheless any policy ideas the UK pursues to win a competitive edge over the EU would be seen as an act of trade aggression. The EU will also be eager to make the point to remaining members that once out the grass is not in fact greener, no matter how pleasant the land might be.

Commons and Lords Square up over Energy Subsidies

Commons and Lords Square up over Energy Subsidies

The Government last month rejected a change to the Energy Bill proposed by the Lords back in October 2015 apparently signalling its continuing commitment to cutting renewables subsidies with a view to lowering energy bills for consumers. However, with technologies such as wind and solar among the cheapest forms of power generation the Government faces an uphill struggle to back such claims up.

The change would have seen the removal of the Government’s controversial proposal to close subsidies such as the Feed in Tariff (FiT) and Renewables Obligation Certificates (ROCs) early. The Government argued that the subsidies were over budget and costing consumers extra money. Industry on the other hand pointed out that the most common technologies to utilise the subsidies, solar and wind, are the cheapest of renewables. Furthermore, industry highlights the fact the international price of gas is the chief reason why the renewables subsidy budget – known as the Levy Control Framework (LCF) – is overdrawn.

As a rule of thumb when the strike price for electricity goes down (this happens when the price of gas goes down) the LCF pays (and costs the Government) more. Likewise when the price goes up the LCF pays less to generators. In coming years it is projected that the Government will gain valuable income as prices rise and generators pay the Government as part of new Contracts for Difference (CfD) – which have been set to replace ROCs since 2013.

The issue hasn’t been so much that the Government is withdrawing subsidies – this has been planned for many years and industry had planned accordingly. The problem is that the Government has hastened the end of the current subsidy regime before developers have had the chance to bring projects to fruition. Subsidies have been closed a year early – for developers with projects six months or a year away from financial close there has been millions of pounds and many years of time invested into getting to this point only for projects to be shelved or abandoned altogether.

houseoflordsThe Government’s push to contain the costs of solar and wind has been in part fiscally driven but the main driver is Conservative Party antipathy to onshore wind in particular. This was evidenced in their 2015 general Election manifesto pledge to “halt the spread of onshore wind farms” and “end any new public subsidy” for wind developments. Not only is the Government seeking to stymie subsidy support, it is also seeking to tighten planning rules governing onshore wind turbine deployment. Fine if you live in a national park, problematic if you live anywhere else.

The Government, which faced criticism over the proposals when the bill was first heard in summer 2015 had initially suggested there was little room for negotiation with peers over the subsidy.  Amber Rudd, Secretary of State for Energy & Climate Change had reiterated this position, citing the pledge to scrap the obligation in the Manifesto in the face of a clamour of dissenting voices. The criticism was not just from opposition parties, but also business, pressure groups and NGOs arguing the early closure of the renewable energy subsidy is hugely damaging for the economy, future energy security and the environment. Indeed back in September when the Bill was first debated the then Director General of the CBI John Cridland suggested the move could risk losing the UK billions of pounds in potential overseas trade in the green economy.

Seemingly in a move to minimise further obstacles to the bill’s passage through parliament in in what is already a very crowded legislative calendar, Decc announced ahead of the February parliamentary recess that they are considering proposals put forward by the wind energy industry to alter key aspects of the bills offer to the sector.

The proposals would, in short, mean providing wind energy contracts on a subsidy free basis – with support only kicking in if prices plunge in the event of a market shock. This underwriting, rather than subsidisation will provide a key financial guarantee for lenders and get projects to market. Details of the proposal have yet to be fleshed out but it is clear that this approach would mean a smaller impact on consumer bills.

The proposal is dividing members of the Conservative party and the Government with some including former Environment Secretary of State citing the Government’s manifesto pledge to end onshore wind farm subsidies. We can expect to see extensive debate There is likely over the definition of ‘new’ in the Conservative election pledge to “end any new public subsidy” for onshore developments as the proposed funding arrangement could, in theory be viewed as a reformulated offering through the Renewable Obligation.

If the Government bows to internal criticism and chooses not to give much ground on this, the Bill could be set to divide the Government and House of Lords once again. The Commons Energy Committee last week resolved to reinstate the clause removed by the Lords detailing the closure of the RO and this will once again be sent back the Lords after the report stage and a further reading in the Commons. We may well be about to witness another impasse between the two chambers which could plunge Westminster into yet another unhelpful period of procedural and constitutional naval gazing.

The arguments over the upper chamber’s ability to vote down Government legislation are well rehearsed and it is not necessary for us hash out the rights and wrongs of the actions of respective houses. Nevertheless the Salisbury Convention can certainly be satisfied in the event the early removal of subsidies are overturned because budgets were allocated until 2020 before the 2015 Manifesto commitment was made.

What we should be concerned about are the implications of the Bill in its current form for both business and communities – jobs in this sector are estimated northwards of 40,000 UK wide. The impacts of the removal of renewable energy subsidies could be far reaching, especially in a country running with barely 1% spare electricity capacity at peak times. It is important that industry continues to interrogate the decision to drop support early. Indeed, the Lords is playing a vital and reasonable role translating the needs of investors who collectively employ many thousands of people as well as drawing inward investment into UK Plc.

A Renewable future for Britain’s Steel Industry

A Renewable future for Britain’s Steel Industry

2015 proved to be a tumultuous year for the steel industry in Britain. Thousands of steel industry jobs were lost, seemingly symptomatic of the chronic decline of one of the last bastions of British heavy industry. Indian owned Tata’s redundancies in Scunthorpe and Lanarkshire caused devastation, as did the job losses at SSI’s Redcar plant. Both attracted a great deal of political and media interest.

The industry has cited several reasons for the problems it is encountering, chief among them is the issue of sustainability in the market.

Save Our Steel

Save Our Steel

Energy-hungry steel plants are hugely expensive to run and Tata and others have argued they are buckling under the costs of operation due to their obligations to pay levies to offset their carbon footprints (as part of the Renewables Obligation- RO). Cheap imports flooding the market from China – known as dumping – have also been cited as a stressor for an industry already under a lot of strain.

The government responded in August 2015 by taking action to exempt the industry from its RO payments and in December the EU also allowed for the UK government to supply state aid – albeit both moves were several years behind schedule. Leader of the Opposition, Jeremy Corbyn, has criticised the prime minister and chancellor for their lack of action, calling for nationalisation of parts of the industry. Perhaps nostalgic for the nationalised British Steel Corporation of the 1970s, he argues that a strong steel industry will be necessary for improving British infrastructure.

There is, undeniably, a problem. And with difficult problems often arise opportunities – in this case to bring about a shift in the balance of an economy. The EU will not provide long term support for state subsidies in the steel industry. Margrethe Vestager, head of EU competition policy, cautioned that subsidies ‘distort competition and (they) risk… a harmful subsidy race within member states’. The EC has already ordered Belgium to recall €211 million paid to Duferco as part of a state bailout, likewise Italy’s payment of €2 billion to Ilva is under investigation.

There is a solution and it involves substantially cutting the cost of running an energy hungry enterprise – the same can apply to any other energy intensive activity. Rather than having the taxpayer absorb the financial cost of pollution from steel manufacturing sites, and then further support the industry through state intervention, we need to cut out the middle man. The current situation is both ecologically dubious, and also fosters a reliance on the government within the industry. In short, heavy industry including steel production should switch to renewable energy.

The two industries enjoy a symbiotic relationship. The steel industry needs renewables and the wider renewables industry needs a reliable supply of steel in order to fabricate key elements of the renewable technology. In this way, the government and industry can work in tandem to take decisive action to give Britain’s steel industry a fighting chance of survival. This will allow the industry to once again become independent and competitive, whilst simultaneously moving towards the fulfilment of our obligation as outlined in the Paris talks to ween ourselves off carbon.

Just how likely this is to come to fruition in light of the current government’s roll back of green energy subsidies, never mind its pig headed approach to planning policy, is up for debate. Certainly a relationship between the steel and renewables industries could be self sustaining, but it would need political backing from Westminster to get the ball rolling.