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UTILITY Week 17th March 2017

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18 | 17TH - 23RD MARCH 2017 | UTILITY WEEK Policy & Regulation Analysis Foggy future for funding The Budget revealed carbon arrangements will be reviewed, with the aim of targeting a "total carbon price", says Nigel Hawkins. A lmost 20 years ago, the incoming Labour government introduced a highly controversial Budget. At its heart lay a one-off £4.5 billion net windfall tax on the privatised utilities, virtu- ally all of which Labour believed had been privatised too cheaply. Close to £2 billion was subsequently paid by the privatised electric- ity companies, while a further £1.6 billion was contributed by the water companies. This time round, the impact of the 2017 Budget, presented by the new chancellor, Philip Hammond, was far less eventful, although the fierce argument raging over raising Class 4 national insurance rates – and whether it breached the Conservative Party's 2015 manifesto – has occupied many column inches. There were, though, several issues affect- ing the UK utilities sector that merit com- ment, although the market reaction of quoted utility stocks to the 2017 Budget was muted. The future of the carbon floor price is relevant. In recent years, it has been instru- mental in driving down the level of UK coal generation. The current carbon arrange- ments are now subject to review, with the revised aim to target "a total carbon price". Also within the electricity space, Ham- mond announced the o-criticised Levy Control Framework (LCF) would be scrapped; it would be replaced by a "new set of cost controls for energy subsidies". The LCF was established to prevent the cost of subsidies funded by levies on cus- tomers' energy bills from spiralling out of control. The framework places caps on the amount which can be spent each year on schemes such as contracts for difference and the feed-in tariff (FiT) between now and 2020/21. In recent years, the government has been forced to take action to head-off a projected £1.5 billion overspend by the last of the year of the budget – closing the renewables obli- gation early and enacting sharp cuts to FiT rates. Hinkley Point C, with its £92.50/MWh strike price, was set to leave a big dent in the budget had it continued. Hammond confirmed that the LCF will not continue beyond then. Given the lead time to plan, finance and develop most renewable projects, there are concerns that an invest- ment hiatus will occur until the details of the new regime become clearer. In the lead-up to the Budget, there had been much discussion about the sharp increases in business rates, following the recent revaluation. Of the water companies, Severn Trent is a substantial payer of business rates. In 2015/16, it contributed more than £77 mil- lion, compared with the £48 million cost incurred by Thames, which has a smaller supply area. Following vigorous pressure from many business organisations, especially in the "This Budget is another climate failure – with the chancellor failing to mention climate change even once." Caroline Lucas, joint leader, Green Party "The government is preparing for a Brexit scenario in which the levers driving decarbonisation are pulled entirely nationally." Richard Black, director, Energy and Climate Intelligence Unit "We need to ensure that developers and investors have certainty so that projects can be built." Emma Pinchbeck, executive director, Renewable UK "The chancellor says he wants the UK at the 'cutting edge of the global economy' – his tax policies for energy risk the opposite." Paul Barwell, chief executive, Solar Trade Association CARBON FLOOR PRICE ILLUSTRATION (IN REAL 2009 PRICES AND CALENDAR YEARS) 40 30 20 10 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: HM Treasury, 2011 Carbon Price Support EU ETS carbon price Combined EU ETS and Carbon Price Support Carbon price floor £/tonne of CO2

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