Opinion

Opinion: Changing face of energy politics

Opinion: Dick Winchester
Dick Winchester

In the week before the general election on May 8, a “weel kent” and highly respected financial newspaper reported that our friends in Norway have earned more in the last quarter from their “oil fund” than the Norwegian government had actually spent.

By any measure this is an astounding achievement and is testament to the Norwegian’s intelligent and strategic decision to set up the fund in the first place.

Interestingly though, this event wasn’t to my knowledge reported elsewhere in the media and it certainly didn’t make it on to the mainstream television news.

Perhaps though, that’s not surprising because, of course, although it may not be repeatable every quarter, it would have reflected very badly on all those unionist politicians who have worked so hard over the past few decades to deny Scotland the financial security that Norway has now so brilliantly achieved.

Of course, a large number of those politicians are – following the general election – no longer around. Some might claim they have finally got their “comeuppance”. I would not be quite so crass.

That said I did manage to smile – quite broadly actually – when I heard that the former chief secretary to the Treasury Danny Alexander had lost his seat, mainly because I think his changes to the UKCS fiscal regime went nothing like as far as they should have and of course he supported the increases in taxation in 2011 that caused so much damage to UKCS confidence levels in the first place.

There was nothing particularly bold about the new changes proposed and I don’t believe the Treasury really understood the urgency of the situation. In fact, they still don’t.

Let’s not forget the industry is still waiting to hear about the provision of incentives for exploration drilling and what’s happened to those seismic surveys we were promised? Oh, and is there a plan as to what to do if, as Goldman Sachs and others believe, the oil price will fall back to $45 by October?

However, while I believe the entire UK energy industry generally has been appallingly badly shepherded by consecutive UK governments pretty much since the 80s, instinct tells me that, with a majority Conservative government, things are actually about to get an whole lot worse.

Whether we like it or not the simple fact is that the UK economy is really on its uppers. The deficit in 2014 was £98billion, about 5.7% of GDP – the biggest deficit since records began in 1948 – and there’s little chance of real progress on reducing it especially given the most recent growth forecasts. The overall debt at the end of 2014 was equivalent to 89.4% of GDP. That’s staggeringly huge.

As far as trade goes the deficit for 2014 was £34.8billion which is the largest it’s been since 2010 when the deficit was £37.1billion. The latest trade figures are also not at all encouraging.

While this is bound to affect the thinking on further changes to the oil & gas fiscal regime and particularly how generous they are, one of the consequences of this situation is that the Chancellor has ordered secretary to the Treasury Greg Hands (he took over from Danny Alexander) to request so-called non-protected government departments come up with proposals for spending reductions that can take effect this year.

The thing that should raise the hair on the back of the neck of those of us who care about the energy industry is that among these are the Department for Energy and Climate Change (DECC) and the Department for Business Innovation and Skills (BIS) which among other things funds the Research Councils and provides support for other research and development programmes.

We also know now that the new secretaries of state that run these departments (Amber Rudd and Sajid Javid) are – how can I put it politely – somewhat to the right in terms of political ideology as compared to their predecessors both of whom were Liberal Democrats.

We already know that the government is opposed to further development of onshore wind but the influential think tank the Policy Exchange believes that the “austerity” programme will have a wider impact on climate change policy.

As it points out the money used to support energy and climate change policies comes from a levy on the bills paid by consumers and levies related to renewables are mainly managed under the so-called “Levy Control Framework”, which was agreed between DECC (Department of Energy & Climate Change) and the Treasury in 2010

In a nutshell, DECC lousy management of the agreed budget (circa £4.3billion in 2014/15) has led to an overspend for at least the past three years due mainly to the small-scale feed-in tariff – it applies to small scale solar and other renewable energy projects – exceeding its budget by 100% (or £450million) in the last year alone.

Looking forward, the Policy Exchange thinks – and I agree – that pressure on DECC to slash its subsidy spend will come from not just the chancellor but a decrease in wholesale electricity prices leading to smaller consumer bills and therefore smaller levies, an increase in the applications for small scale renewables projects (notably solar) and an underestimate of how efficient offshore wind turbines are which, if they produce more energy means higher subsidies than DECC estimated.

Given the parlous state of the nation’s finances there’s no chance of the renewables subsidy budget going up so inevitably the number of projects will go down with all that implies in terms of the installation industry.

However, just as scary is what’s happening to the science budget, which includes research support for new energy technologies.

Already well below the levels of all the other G8 countries at about 0.48% of GDP, in the face of the deficit the government will have to either cut the budget further or become very selective over what it funds.

We already know the funding for oil & gas research is pretty much non-existent but there is still some funding available for renewables research although compared to our competitors it’s very small beer.

So, if like me you remain hopeful that one day we will develop a meaningful and broader based renewables technology manufacturing sector we’re probably going to be disappointed. But aren’t we always where the Treasury is involved?

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