UK: 2011 Budget – Implications for the UK’s Energy Sector

Last Updated: 5 April 2011
Article by Humphrey Douglas, Zoe Hammond and Wei Wu

On 23 March 2011 the Chancellor of the Exchequer, George Osborne, delivered his Budget statement to the House of Commons. The 2011 Budget contains measures designed to hasten the speed and scale of investment in low carbon energy projects, including the introduction of a carbon price floor for electricity generation from 1 April 2013, the establishment of the Green Investment Bank (GIB) but also a "windfall" tax on North Sea hydrocarbon producers.

Carbon price support

The 2011 Budget announces that the Government will introduce a carbon price floor for electricity generation from 1 April 2013, to drive investment in the low carbon power sector. The carbon price floor will tax fossil fuels used in electricity generation under the climate change levy (CCL). The carbon price floor will start at around £16 per tonne of carbon dioxide and follow a linear path to £30 per tonne in 2020. The carbon price support rates for 2013-14 will be equivalent to £4.94 per tonne of carbon dioxide.

The Government also intends to introduce relief for carbon capture and storage (CCS) and combined heat and power (CHP) projects, and to remove an existing exemption in the CCL for electricity CHP plants supplying indirectly to energy consumers. Anti-avoidance provisions will be introduced to prevent forestalling with effect from 23 March 2011.

Green Investment Bank (GIB)

The Government also announced that the initial capitalisation of the GIB will be £3 billion and that it will start operation in 2012- 13, a year earlier than previously anticipated.

The Government is targeting another £15 billion of private sector investment in green infrastructure by 2014-15, as a result of the GIB. The Spending Review 2010 allocated £1 billion for the GIB, and the Government is aiming for the remaining £2 billion to be funded from the sale of assets. This will include the £775 million net proceeds already received from the sale of High Speed1, ensuring that funding is in place to allow GIB funds from 2012-13. The GIB would not be able to borrow until 2015-16 and, even then, only if the Government's debt targets are met.

Tax increase on North Sea oil production

The fuel duty escalator will be replaced with a "fair fuel stabiliser" that increases tax on North Sea oil production when oil prices are high (and producers are theoretically making greater profits). The Government will increase the Supplementary Charge on oil and gas production from 20 per cent to 32 per cent from 24 March 2011. The Government expressed a commitment to reduce this Supplementary Charge back towards 20 per cent if oil prices fall below at a certain level, currently considered by the Government to be $75 per barrel.

As the increased rate of Supplementary Charge will only apply when oil prices are high, the Government will restrict tax relief for decommissioning expenditure to the 20 per cent rate to avoid incentivising accelerated decommissioning. There will be no restrictions to decommissioning relief below this level for the lifetime of this Parliament. Recognising the importance of continued investment in the North Sea, including in marginal gas fields, the Government will also consider with the industry the case for introducing a new category of field that would qualify for field allowances.


The Energy and Climate Change Secretary Chris Huhne commented on the 2011 Budget:

"There is a clear, long term signal to energy investors in today's Budget. A Green Investment Bank with substantially more capital and borrowing capacity and a stronger, more stable carbon price put investment in green energy technologies at the heart of the coalition's strategy for sustainable, balanced economic growth."

The 2011 Budget announced that the Government is committed to being the greenest Government ever and will make the UK the first country to introduce a carbon price floor for the power sector, and whilst some commentators will deem the carbon floor price to be an indirect support mechanism predominantly for the new nuclear power generators, it also raises the issue of potential windfalls for existing nuclear generators and may threaten the EU Emission Trading Scheme, particularly if other EU Member States implement carbon floor prices or caps. The renewable energy industry will also benefit from the carbon price floor and will also welcome the GIB's nascent entry to the market.

Whilst increasing North Sea hydrocarbonrelated tax may have a political and social justice logic to it, it does nothing to encourage the international investment community's perception of UK political risk issues and, when compounded with the UK Government's recent review of Feed-in Tariffs etc, may further discourage investment certainty. Some commentators have however pointed to the fact that increasing the effective tax rate on North Sea production may make some exploration plays more economic.


1. High Speed 1 is the railway between St. Pancras in London and the Channel Tunnel and connects with the international high speed routes between London and Paris, and London and Brussels.

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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