UK: Spending Review 2010: Impact on Energy Sector

Last Updated: 21 October 2010
Article by Michelle T. Davies and Stephen Hill


The Budget released in June 2010 set out the overall level of Government spending for the four years from 2011/12 to 2014/15. The Spending Review released today is the process through which this spending is allocated to pay for all areas of Government activity including public services, social security, and administration costs. Spending Reviews aim to allocate resources across Governmental departments over several years. Each department is then able to manage and distribute this budget internally.

The Spending Review confirmed the anticipated reductions in the budgets of a number of key areas of public sector provision, including the announcement that the Department of Energy and Climate Change (Decc) will be cut by 5%. Importantly, the Government highlights their continued support for "action on renewables" and the commitment to obtain 15% of energy from renewables by 2020 in supporting the roll out of large and small scale technologies, including renewable heat.

We have set out below the key elements of the Spending Review and how they effect the renewable energy market and in particular the impact that this reduction will have on Decc.

Spending Review 2010

1.      Feed in Tariffs (FITs)

The Spending Review does not provide for any major change to FITs, it simply notes that the efficiency of FITs will be improved following the next formal review. In essence the next formal review will aim to prioritise support to cost effective carbon abatement technologies. As initially envisaged the next formal review will take place in 2013.

In particular, there has been concern in the market that FITs for certain technologies, including solar pv, could be reduced before 2013. Following the Spending Review the aim to re-focus on the most cost effective technologies will be implemented at the "first scheduled review of tariffs unless higher than expected deployment requires an early review".  This suggests that no change will be made to the FITs regime before the next formal review. We anticipate that there will be a high deployment for FITs, in particular solar pv, and there is concern that if an early review is scheduled that the proposed revenue for projects will reduce. An early review will only arise if the Government feel that deployment is 'higher than expected'; the expectancy levels are unknown. Please note however that this has always been the position and a market uncertainty from the outset

2.      Supporting the Low Carbon economy

Support for low carbon energy sources is noted as one of the key areas for prioritising growth. The Spending Review announces major new reforms and investment in low carbon technologies to help position the UK at the forefront of the transition to a low carbon economy. In particular they provide for the following:
  • up to £1 billion for one of the world's first commercial scale carbon capture and storage demonstrations on an electricity generation plant
  • more than £200 million for the development of low carbon technologies including offshore wind technology and manufacturing at ports sites
  • £860 million of new support over the Spending Review period to support households and businesses investing in renewable heat measures
  • increased expenditure through existing support mechanisms that are funded through obligations on energy companies, that will lead to a total of £5.6 billion of support for renewable electricity installations over the Spending Review period.

The Government is also committed to establishing a UK-wide Green Investment Bank (GIB). This institution is proposed to "make a radical new contribution to financing green infrastructure through having an explicit mandate to tackle risk that the market currently cannot adequately finance". The aim of this institution is to promote further private sector investment, aiming to facilitate the entrance of new types of investor into green infrastructure. The Government aims to have completed the design and testing work for this by Spring 2011. The budget for the GIB will be £1 billion.

3.      Department of Energy and Climate Change

As noted above, Decc's annual budget is to be reduced by 5%. The Spending Review highlights the requirement for Decc to prioritise spending in areas where it can have an impact. The Spending Review settlement for Decc highlights key areas for priority in addition to those noted at point 2 above, there are plans for increased incentives for low carbon energy generation through the Renewable Heat Incentive, a Green Deal enabling households to improve the energy efficiency of their homes at no upfront cost and overall savings within Decc's core resource budget of 30% by 2014/15, including through cutting lower value projects and focusing on key priorities.

Please note Decc will continue to manage Britain's historic energy liabilities, including capital funding for the Nuclear Decommissioning Authority (NDA).

It was announced last week that three of Decc's organisations would not be retained: UK Chemical Weapons Convention National Authority Advisory Committee, Advisory Committee on Carbon Abatement Technologies and the Renewables Advisory Board. The nine bodies being retained may be subject to further changes following today's Spending Review. In particular, two of the retained bodies Ofgem and the Coal Authority, are subject to longer term review. Decc is due to produce a report in 2011 following a review of the regulatory functions of Ofgem.


As anticipated the Government continues to promote a firm support for renewable energy. The Spending Review can certainly provide comfort to the speculations and doubts that have arisen in the market concerning review of the FITs. Whilst it is not certain that no future review of the FITs regime will occur before 2013, it looks extremely unlikely that this will be the case and in any event the existing risk position of 'deployment' remains the same as at the outset.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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