The Energy Strategy

The long promised Energy Security Strategy was published on 7 April. Originally promised for publication in March, it is the first policy of its kind and had something of a mixed reception. Targets for nuclear, offshore wind and green hydrogen generation were improved in an attempt to increase carbon free generation, but measures to encourage reduction in energy demand were almost completely absent.

The strategy document is particularly reticent about how revised targets will be funded and, while there was a supplementary announcement the day after the release of the strategy setting out how some measures will be supported financially, the funds available will be very limited. Some £375M will be available to support technology development in areas like carbon capture and storage (‘CCS). This compares unfavourably with the £1BN funding for commercial CCS development that was held out for competition in 2015, only to be withdrawn before the bids were completed.

Indirect tax could play an important role in encouraging investment in new technologies and in reducing energy demand. The Spring Statement preceded the Energy Security Strategy and announced a limited extension of the VAT relief available to energy saving materials here but its difficult not to be disappointed that more wasn’t done.

A strategy to really support the UK’s energy strategy and help meet net zero targets could include the following:

-     A reduction in the rate of VAT applicable to fuel (rather than fuel duty) could be introduced with almost no cost to HM Treasury. VAT is calculated on the sale price of fuel, rather than the volume of fuel, so VAT receipts from fuel sales have increased dramatically over recent months, providing a windfall for the Chancellor. Applying a reduced rate of VAT could make fuel cheaper and still raise the same level of revenue as last year.

-    Renewable source electricity was exempt from Climate change levy (‘CCL’) until 2015, when it became subject to the same rate of CCL as electricity generated from fossil fuel. It is critical for investors in new renewable generation technology, that they are reassured that there will be a market for the energy that is finally generated from these new sources. Announcing now, that CCL relief will be available for energy produced from certain developing technologies (tidal, geothermal, green hydrogen) would help provide this reassurance.

-    VAT on energy saving materials could be broadened to include all forms of refurbishment and insulation materials, including where those materials are installed as part of broader refurbishment work.

-    Disappointingly, the amount of VAT that employers can deduct on energy used by company EVs, is less than the level of VAT deductible on petrol and diesel company cars. This may be an anomaly, but if so, it needs to change.

There are many other areas where VAT and environmental taxes can be developed and evolved to help the UK’s energy security and encourage new zero activity. We wait eagerly.

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