Utility Week

UTILITY WEEK | 10TH - 16TH NOVEMBER 2017 | 11 Policy & Regulation Analysis Macro economy Although Brexit is of paramount importance to current government policy, economic management still remains a priority as the UK seeks to sustain its current growth lev- els, and to curb public sector net borrowing, which has been falling sharply of late, albeit from shockingly high levels. In his forthcoming Budget, the chancel- lor, Philip Hammond, is expected to con- firm a growth target figure of around 1.5 per cent, which – given the many challenges – would be seen as broadly acceptable. It is also anticipated that Hammond will confirm a full-year borrowing target of c£50 billion, which would result in overall national debt exceeding a staggering £1.8 trillion. It is against these projected growth and net debt figures that the 2017 Budget will be framed. Housing It seems inevitable that housing policy will be at the core of this Budget. In recent years, home ownership levels have fallen sharply. Moreover, concerns about housing issues, especially for those in their 20s and early 30s, is widely regarded as a key factor in the Conservative party's lacklustre general elec- tion performance. On the basis that Hammond will seek to kick-start a new house building pro- gramme, there will be a major impact on future utility provision, ranging from new mobile telephone base-stations to electricity substations. In some regions, notably the Midlands, East Anglia and the South East, the increase in house building could be pronounced. Expect the water companies to study the Budget proposals carefully so that they can include the impact of any new housing poli- cies in their business plans for the forthcom- ing periodic review. Taxpayers/energy consumers Inevitably, many of the Budget headlines will focus on direct and indirect taxes. Any changes to the basic rate of income tax or to personal allowances – along with duty levels on fuel, alcohol and tobacco – will feature prominently. Assuming that the planned reduction in corporation tax to 17 per cent by 2020 is retained, it will be any changes to oil and gas taxation that are most likely to impact lead- ing utility stocks such as Centrica. In his Budget, Hammond may give fur- ther details of the proposed energy cap, which is the driver behind the dra energy legislation. For energy suppli- ers, the scope of this bill will be cru- cial. First, it must be deter- mined, prob- ably by Ofgem, how widely the energy cap should apply – it is likely to embrace those customers currently on stand- ard variable tariffs. Second, setting a fair retail price cap, especially if input costs – say, gas – change markedly, will be challenging. There may even be a case for resurrecting the 1990s energy supply formula. Generation The Budget is expected to include some changes to the complex system of subsidies granted to promote electricity generation investment. There have been calls from both SSE and Drax Group – as reported recently in Utility Week – for the UK carbon price to be sharply raised, which would benefit the renewables sector. Hammond could act on this front. Alternatively, he could home in on the recent offshore wind auction (as many offi- cials at the Treasury are undoubtedly doing), which saw winning bids for contracts for dif- ferences (CfDs) of £57.50 per megawatt-hour. Given that this figure was way below expectations, it may – by accident – become a new benchmark for generation subsidies. The continuing lack of investment in new gas-fired plant remains an enduring con- cern, given its ability to deliver substantial Hard choices for Hammond From renewables to housing, there are plenty of demands on government cash, and all against the backdrop of Brexit. Nigel Hawkins looks at some of the areas likely to feature in the Budget. amounts of much needed baseload power. Adjustments to the UK carbon price regime could help make such investment more attractive. Future tax changes In the Budget, there are bound to be many minor – and probably complex – tax changes, oen driven by the Inland Rev- enue's determination to close tax loopholes. In the water sector's case, it is plainly anoma- lous that some water companies have been pay- ing next to no corporation tax in recent years – Thames and Anglian fit into this category. In the former's case, it received total corporation tax credits of £123 million over 2015/16 and 2016/17. It would be quite simple to impose a mini- mum level of corporation tax that must be paid each year, irrespective of capital allow- ances and interest payments. This anomaly has persisted for some years so it is unlikely that major changes will be announced on 22 November. More generally, in the medium term there may be a move towards limiting the offset of interest charges against taxable company profits. In the US, president Donald Trump may shortly endorse a policy that goes down this route: it would have far-reaching ramifica- tions if it were eventually adopted in the UK. Not only would equity financing be boosted – at the expense of debt – but much of the rationale underpinning private equity would be called into question. Of course, for highly-geared utility com- panies and especially private-equity-owned water companies, such a change would be fundamental even if a generous capital allowances regime were retained to lower corporation tax liability. Nigel Hawkins, director, Nigel Hawkins Associates "It is plainly anomalous that some water companies have been paying next to no corporation tax in recent years"

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