BLOG | Karen Turner | October 2024
This week we had the ‘almost Halloween’ budget, on 30th October. For those who like to examine the detail, the House of Commons Library has produced its usual (51 page) ‘summary’ (though that IS a summary on the full 170 page policy paper on the Budget!). Let’s pick out the headlines as concerns energy demand and the net zero transition.
What we expected around energy
We knew two things were definitely coming ahead of the new Chancellor’s first Budget. First, the pre-announced extension of the energy profits levy, with reduction in investment allowances, set out in Labour Party Manifesto and announced by the new Government in July, was confirmed.
Second, and more important for energy demand (but not really in the right ways) was July’s announcement of the removal of the Winter Fuel Payment from all pensioners who don’t receive Pension Credit or other means-tested benefits, which is estimated to save the exchequer £1.3billion this winter and £1.5billion in subsequent years. This change is estimated to affect 9.2 million pensioners with an average loss of £170 per year. Of course, where this becomes a problem is if it stops older people heating their homes as required to stay healthy and to avoid additional pressure on NHS resources in the wintertime. Arguably, such challenges point to the need for more careful consideration of how this formerly universal support should be means tested without risking the health and wellbeing of older citizens on lower but not the lowest incomes. North of the border, where winters tend to be more harsh, the Scottish Government is following the UK Government in making this change, though technically it didn’t need to.
The ‘news’ that may not do much to affect energy demand
Less anticipated may have been the continued freeze in fuel duty – involving extending the 5p cut for another 12 months and not increasing the rate with inflation – given its estimated cost of £2-3billion next year (25/26). While limiting further increases in the cost of living and doing business, this won’t do much to help reduce transport emissions, especially when taken alongside a lack of attention to reducing the cost of public transport, with this Budget including an increase in the bus fare cap from £2 to £3 beginning in January 2025.
On the other hand, there are a range of increases in air passenger duty. However, these are mostly in line with inflation (the retail price measure), except for larger private jets, where there is an additional 50% increase. This is all projected to raise about £0.7billion by 2029/30 but it is not clear what the impact on demand for emissions intensive air travel will be.
The biggest things on energy – GB Energy and investment in infrastructure
A central concern in terms of the challenges of reducing energy demand and transitioning to net zero is the Department for Energy Security and Net Zero (DESNZ) settlement. There was quite a bit of positive news in this regard in the Budget. On the demand side, the DESNZ settlement enables some important steps towards developing a Warm Homes Plan, including the commitment of an initial £3.4 billion towards heat decarbonisation and household energy efficiency between 2025/26 and 2027/28. From an Equity perspective (one of our five themes in the EDRC, the one I lead), this includes £1.8 billion dedicated to supporting fuel poverty schemes, which we’ve already begun researching in our EDRC work, with a new policy brief considering the impacts of different approaches published this week.
There is also just over £1 billion of funding over three years to fund hundreds of local energy schemes, with the aim of helping decarbonise the public estate through the Public Sector Decarbonisation Scheme. To support decarbonisation of firms in the private sector, continuation of the Industrial Energy Transformation Fund (IETF) is confirmed, with £163 million committed 2025-26 to 2027-28 (noting that the Scottish Government opted to operate a separate Scottish IETF, the SIETF, through an additional element of the Block Grant).
The DESNZ settlement also includes funding for a range of new energy industry and decarbonisation projects, including the first round of green hydrogen production contracts and £3.9 billion in 2025-26 to support investment in the Track-1 CCUS programmes to support decarbonisation of the energy-intensive Teeside and Merseyside industry clusters. On the supply side, it also provides £134 million to support the delivery of port infrastructure required to facilitate floating offshore wind. £2.7 billion is committed to new nuclear, through continued support of Sizewell C’s development during 2025-26. However, it is important to note that all major multiyear commitments will not get a Final Investment Decision on whether to proceed with until Phase 2 of the Spending Review in late Spring 2025.
The highest profile element of the DESNZ settlement may be funding for GB Energy (GBE), both to establish it as a company headquartered in Aberdeen (£25 million), and £100 million in capital funding for clean energy project development in 2025-26. As yet, just how GBE will impact energy demand, particularly through the claim that it will ultimately reduce household energy bills – though, crucially, this can only be through our electricity bills (where GBE supported developments can feed through to things like the reduced cost of renewables affecting the prices we pay), not the cost of the gas most UK households still use to heat their homes. Developments through the Warm Homes Plan outlined above are much more important in tackling how much energy we need to use, and how.
A closing thought – the rise in employers’ national insurance contributions WILL affect EVERYTHING
The big headline of this budget is the rise in the tax that all employers pay on the wages of workers. While the government argued that this is crucial to fill ‘the black hole’ in the public finances, projecting that the move will raise around £24 billion to £26 billion a year by 2025/26, the Office for Budget Responsibility (OBR) and a multitude of employer voices have pointed out that this total will be eroded by a range of indirect responses, including reductions in wage settlements and employment itself.
My own reflection in closing off this summary of the Budget is that anything that increase the cost of employment WILL have implications for delivering all the energy and net zero actions set out above. Worker and skills shortages are already identified as a real delivery and cost challenge for all the major actions on energy demand and supply that need to be taken within relatively short time scales. How things will pan out as our regional, national and occupational labour markets adjust to the increase in this central tax on employment, and how this may affect delivery (and domestic content) of actions on energy demand, supply and net zero remains to be seen. However, it is another source of uncertainty that we probably don’t need at this crucial stage in our transition.
Image credit: HM Treasury on Flickr