Spring Budget 2023 and the UK's clean energy and infrastructure future

On Wednesday 15 March, the Chancellor, Jeremy Hunt, delivered his Spring Budget, positioning it as a “budget for growth” and an “enterprise-focused economy”. Emphasising the need for both energy security and a “clean energy future,” the Budget includes “unprecedented” investment in domestic carbon capture, usage, and storage (CCUS) and low carbon energy, along with renewed efforts to grow the UK’s nuclear power industry.

We summarise the key points for participants in the UK energy and infrastructure sectors:

• CCUS: In what some commentators have described as a “riposte” to the US Inflation Reduction Act, the Chancellor used his Budget Speech to confirm a package of £20bn investment in CCUS technology over the next 20 years. Intended to scale up the industry, the investment will fund projects to deliver the Government’s ambition to store 20-30 million tonnes of CO2 annually by 2030, helping the UK meet its national Net Zero targets whilst creating up to 50,000 jobs. Perhaps seeking to assuage industry frustration at the delays to the Government’s cluster deployment plan (originally launched in 2021) for large-scale CCUS in two industrial clusters by the mid-2020s (known as Track 1, phases 1 and 2) and two more locations by 2030 (known as Track 2), the Budget outlines a timetable for key decisions:
  1.  A shortlist of projects for the first phase of CCUS deployment (so called Track 1, phase 2 projects) will be announced later this month.
  2. Further capture projects “will be able to enter a selection process for Track 1 expansion this year”.
  3. The process for Track 2 and the selection of two additional industrial clusters will be “announced shortly.”

Interestingly, addressing uncertainty over tax relief for oil and gas decommissioning projects, the Government has also undertaken to introduce legislation in a future Finance Bill to “establish the tax treatment of payments made into decommissioning funds by oil and gas companies in relation to the repurposing of oil and gas assets for use in CCUS projects.” Broadly speaking, these announcements have been greeted positively across the CCUS sector. However, questions remain as to how the £20bn investment headlined in the Budget will be deployed, and whether any further funding will be announced in the Autumn Budget to increase the UK’s competitiveness and to facilitate Track 2 industrial clusters and development of further carbon capture projects.

• Nuclear: Building on its £700m investment in Sizewell C in 2022, the Government now appears unequivocal in its support for the UK nuclear power sector. In particular, the Chancellor announced the launch of Great British Nuclear (GBN), a new body first proposed in April 2022, which will “address constraints in the nuclear market and support new nuclear builds.” The Government is also committing significant political capital to support Small Modular Reactor (SMR) technologies. It plans to launch a competition this year to attract SMR designs from domestic and international manufacturers. Through this competition, the Government intends to co-fund a number of selected SMR manufacturers able to demonstrate viable technologies. Whilst GBN will initially focus on SMRs, it will also consider large gigawatt-scale projects—subject to value for money, relevant approvals, technology readiness and maturity—capable of meeting the UK’s ambition to generate up to 24 GW of nuclear power (amounting to a quarter of the UK’s projected electricity supply) by 2050. Separately, some media outlets report that the Government intends to consult on a new approach to nuclear site selection later this year. Finally, subject to consultation, nuclear power generation will be classed as “environmentally sustainable” under a revised and modified UK green finance taxonomy regime. This would align the UK and EU taxonomies in relation to the nuclear sector. It is hoped this measure will facilitate private investment in new nuclear on a par with that seen in the renewable energy sector.
  
  
• Funding the energy transition: A key question for investors in projects to deliver the UK’s decarbonisation objectives is the budget envelope for public sector support. The Government has said that it intends to set out plans later this year to refresh the existing Control for Low Carbon Levies (CLCL). Originally published in 2017 before the UK’s Net Zero commitments, the CLCL will be replaced by a new framework to reflect the UK’s new energy security priorities.
  
  
• Energy Price Guarantee: Sensitive to the impact of inflationary pressures on households, the Chancellor confirmed that the Government will maintain the current level of the Energy Price Guarantee at £2,500 until the end of June 2023, postponing a rise to £3,000 on 1 April. With the policy costing less than anticipated—due to lower than expected gas prices this winter—Jeremy Hunt likely found himself with budget to defer the rise by three months, noting that “with energy bills set to fall from July onwards, this temporary change will bridge the gap and ease pressure on families, while also helping to lower inflation too.” From July, households will pay the lower of the Ofgem Price Cap or the Energy Price Guarantee, which will revert to £3,000 from July 2023 until the end of March 2024.
  
  
• Energy Bills Discount Scheme: As the Energy Bills Relief Scheme supporting business and non-domestic customers is due to come to an end on 31 March 2023, the Government confirmed its replacement with the Energy Bills Discount Scheme. Providing a discount on wholesale gas and electricity prices, it is scheduled to run until the end of March 2024 and offers targeted support to businesses in sectors with particularly high energy use and trade intensity. However, other than a £63m fund to help “keep our public leisure centres and pools afloat” as they struggle with high energy costs, and plans to extend the Climate Change Agreement scheme (see below), it was notable that the Chancellor made limited announcements with regard to commercial energy consumers. This has prompted some analysts to suggest that “without extending help for business as well as households, growth might be difficult to incubate.”
  
  
• Climate Change Agreement scheme – The Government will extend the Climate Change Agreement scheme by two years. The voluntary scheme, originally introduced in 2001, encourages energy-intensive industrial and agricultural businesses to invest in energy efficiency measures in return for reduced rates of Climate Change Levy (CCL). Participants that meet agreed energy efficiency targets will be entitled to reduced rates of CCL in 2025-26 and 2026-27. The Department for Energy Security and Net Zero has opened a consultation on the extension and proposals for any potential future Climate Change Agreement scheme. The consultation runs until 10 May 2023.
  
  
• Investment Zones: The Treasury plans to provide 12 regional zones with up to £80m each in tax incentives and grant funding over five years. Described as “12 potential Canary Wharfs,” these zones are intended to drive investment in strategic industries—including the clean technology sector—and will be located around existing research institutions or universities. Eight of these zones are to be located in England (East Midlands, Greater Manchester, Liverpool city region, South Yorkshire, Teesside, West Midlands, West Yorkshire, and the proposed North East Mayoral Combined Authority). Four will be developed in yet-to-be-chosen sites in Scotland and Northern Ireland.
  
  
• Local investment and transport infrastructure: Since its June 2021 launch, the UK Infrastructure Bank has completed 10 deals, worth over £1 billion. The UK Infrastructure Bank Bill—which is progressing through its final stages in Parliament—will give the institution expanded powers to invest in climate change and Levelling Up projects. In all, the Government plans to deliver over £600 billion in gross public investment in high quality economic and social infrastructure across the UK over the next five years. This figure includes more than £400 million to cultivate new Levelling Up Partnerships in 20 areas of England over the next two years. The Budget also announced a second round of the City Region Sustainable Transport Settlements programme, allocating £8.8 billion over the next five years for English city regions to transform their local transport networks. Moreover, reforms to the Nationally Significant Infrastructure Project planning process will focus on delivering sustainability and community benefits, as well as more certainty for investors.
  
  
• Business investment and tax: The Government will also introduce a temporary 100% capital allowance—a form of tax relief allowing businesses to deduct the costs of certain items (including equipment and machinery from their before-tax profits)—as a measure to help stimulate business investment. Some commentators indicate this is “perhaps the most meaningful move” for pursuing energy and climate-related objectives, which could significantly improve the financial viability of many emerging net zero projects. For more details of Spring Budget tax measures, please read the Slaughter and May European Tax blog post.

Overall, from an energy and infrastructure perspective, the Budget is evolutionary, not revolutionary. But it does lay the foundations for progress on some key issues and in some key sectors for UK energy and infrastructure. The announcements for CCUS, nuclear and transport infrastructure will be important, not just for delivering the UK’s net zero commitment but also in stimulating in the UK economy. Amongst the measures however, the refresh of the CLCL should not be underestimated. The Budget has set the scene for a crucial debate on consumer levy-funded policies which underpin support for renewable energy and may also have a role in delivering low carbon hydrogen. Industry and investors will be keen to see how these policies develop over the coming months.

The Spring Budget is published in full here.

The Chancellor’s Spring Statement Speech is available here, and the suite of accompanying Budget policy and costing documents can be accessed here.