This is a Budget like no other in recent times. Delayed due to a surprise general election, the first under Prime Minister Johnson, being delivered by a Chancellor appointed less than a month ago, and happening within a challenging geopolitical and economic environment.
This backdrop makes it hard to predict what announcements will be made when Rishi Sunak delivers his first Budget speech on 11 March. But if ever there was a time to incentivise investment in renewable energy, the time is now.
In 2020, the eyes of the world are on the UK as Glasgow hosts COP26, widely seen as the most important climate summit since Paris in 2015, given the now unprecedented focus on climate change and the growing consensus that more needs to be done to reduce carbon emissions, and quickly. The UK has taken the lead by committing to net zero emissions by 2050 (2045 in Scotland). The need to decarbonise goes beyond energy but the transition from fossil fuels to renewables will be a key piece of the puzzle. To meet the Paris Agreement’s climate change goals, the International Renewable Energy Agency estimates around US$26t will need to be invested in low-carbon power generation globally by 2050.
The UK ranked 7th in EY’s latest Renewable Energy Country Attractiveness Index. What part can tax policy play in moving us further up the rankings and incentivising the investment in renewable energy that will be essential to hit net zero?
The Taxation Working Group of the Infrastructure Forum recently submitted some innovative ideas on tax policy to the Chancellor to encourage investment in UK infrastructure which could contribute to the attractiveness of the UK renewables sector. Two eye catching ideas were an infrastructure tax credit and an infrastructure bond.
The research and development expenditure credit (RDEC) has been an effective tool in promoting and incentivising innovation across various sectors of the UK economy. A similar tax credit targeted towards infrastructure (an Infrastructure Development Expenditure Credit, or IDEC) could be a further valuable incentive to invest in renewable energy projects by providing additional funding support in the early stages of development.
The rules relating to financing have become increasingly complex over the last few years with the introduction of the corporate interest restriction rules. An infrastructure bond which provides relief from withholding taxes and certainty around interest deductibility would simplify the existing rules and potentially make financing renewables investments a more attractive proposition.
Arguably, renewable energy groups will benefit most from increased certainty over key tax reliefs that already exist. Increasing the certainty over tax outcomes will have a material commercial impact, given the necessity to attract investors for privately funded projects. Uncertainty over the timing of capital allowances tax relief and establishing qualifying spend can have as much as a one per cent impact on the internal rate of return of a project.
In particular, targeted capital allowances for low carbon power generation and clarity from HMRC over their application to renewable energy projects would be a key step to promoting the significant investment in renewables that is needed across the UK.
Currently, the most popular developed project investments are those attracting subsidies and incentives such as the Renewable Heat Incentive, which still has 15 to 20 years to run. As these subsidies have ceased, it would be good to see increased subsidies again to encourage more innovation in the sector.
Will this be a Budget to achieve net zero? We’ll find out when the Chancellor stands up at lunchtime on Wednesday….