Wednesday, March 21, 2012

Osborne's budget misses a golden opportunity for clean energy

It may sound a little odd, but Budget day in the UK has always provoked in me rather more excitement than it should. Not because I have deep concerns about the Chancellor's impact on my taxes to HMRC.
But since reporting on clean energy policy and finance in the US, where the fiendishly complex tax system is even more loathed, I've had a renewed appreciation of tax codes as an expression of a nation's deepest values in the same way that a nation's music or cuisine reflect the spirit of its people and resources. 
Osborne called his Budget one that "rewards work" but Labour leader Ed Miliband described it as a  "millionaire's Budget".
Beyond the usual Punch & Judy script between the Tories and Labour, what is George Osborne really saying in this budget about the British psyche and the needs of its people - or perhaps in this budget he was speaking more of the sensibilities of a politician born to privilege with no real appreciation of what motivates people to work hard.
Osborne knows that what comes out of his red box will go straight to royal assent without parliamentary debate. In the US, the president's budget is thrown to the congressional wolves who tear it apart and piece it slowly back together again with compromises on both sides.
I don't know which system is better, but given the apparent lack of intellectual rigor, Osborne's third budget could only be improved by parliamentary interrogation.
Shale gas
It's clear that the UK is in danger of an energy crunch  - a fifth of its capacity will drop from the grid by 2020.

The UK government plans to introduce a package of oil and gas tax measures to secure billions of pounds of additional investment in the UK Continental Shelf and will publish a strategy for gas generation in autumn 2012, recognising that gas-fired electricity generation will continue to play a major role in UK energy supplies over the next decade and beyond.
To avoid catastrophe, Osborne wants to encourage the oil and gas industry to unlock the potential remaining in the North Sea. I get that. 
But what I don't get is the £3bn in tax credits to tempt an industry which has balance sheets bursting with idle investment £££s and $$$s. It's naive to think that this will make a huge difference to gas exploration companies - it's a bit like giving Warren Buffet $3m. It would be more than most individuals could ever hope to earn in a lifetime, but yet for Buffet, it's pin money he doesn't need and neither do the oil and gas companies. 

Global companies would probably have been happy enough with the reduction in corporation tax - 26% to 24% in April 2012, down to 22% in 2014 - one of the lowest in the world. As the US shows, a high corporate rate is no bar to corporate success.
Fossil fuel producers and generators are most attracted to the UK because of the economics of high electricity prices. Does Osborne perhaps think that the toothless Ofgem will force utilities to pass through the reduced cost of electricity generation from lower gas prices once drilling into the UK's shale has begun?
If he'd wanted this particular tax break to be warmly received, he should have connected the dots here for the electorate, probably because according to a shale gas report in 2010: "It is expected that it will take about two to five years to firmly establish the potential of shale plays in Europe and it is only after 2020 that the production will have any considerable affect on the supply of natural gas."
In any case, most of Europe's shale gas is going to come from Poland, where ExxonMobil, Chevron, ConocoPhillips, Marathon Oil, Talisman Energy and Chevron are elbowing each other out of the way. Osborne is taking a huge risk with taxpayer money by trying to attract this kind of investment: aside from the environmental downsides of hydrofracking, open land is scarce and expensive in the UK, unlike Poland where the population density isn't anything like as great.
Streamlining redtape and permitting can also have the same impact as tax breaks for large exploration companies - without having to make spending cuts elsewhere from the most vulnerable. Let's hope Osborne's gamble works - so that tax receipts from oil companies will be worth more than the £3bn lost by the taxpayer.

There is additional uncertainty over reserves of oil and gas remaining in the North Sea - forecasts were not included in the budget. I spoke with a geologist working for a small company hoping to explore small reserves in the North Sea that the oil majors wouldn't even consider because of their relatively tiny size. The geologist told me that calculating estimated reserves at such small scales increased uncertainty about what could be recovered: it was really more about pot luck than seismic surveys.

Does Osborne really think he will spark a miniature oil & gas rush back to the North Sea? Some figures would be helpful but I doubt the chancellor will rush to publish such de minimis numbers.
Alan McCrae, energy tax partner, PwC, said: "Overall, the package is to be welcomed as a boost for investment in the oil and gas industry in the UK.

"The proposals to extend field allowances for oil and gas projects will help mitigate against the very high rates of tax suffered by oil and gas companies and will allow some projects to proceed that would otherwise not be viable. By careful targeting of the incentives, these projects should now be able to go ahead and, by doing so, will enable them to make a significant contribution to future Government revenues from the oil and gas industry.

"The plans to give oil and gas companies greater certainty regarding tax relief for their decommissioning costs will also help the investment climate. This will give them significant reassurance over this area of uncertainty which has been blocking potential transactions in the North Sea. These transactions are important to the future of the UK oil and gas sector as the region matures and further significant investment is required to maintain production
Reduced tax credits
Taking away tax credits for parttime workers speaks volumes about Osborne's attitudes to those on a low income. It's a hypocrisy that he wants to reduce benefits for low income or no income households without provision of an encouraging alternative. He is saying loud and clear: I'm going to reduce benefits, but provide no alternative for growth.
For many, part-time work is a stepping-stone to other things: a step down from full time work; a step up from unemployment; a step into the unknown to support a new venture dreamt up by someone with entrepreneurial flare.
But to claim that reducing the top rate of tax will encourage "competitiveness, encourage entrepreneurship and support growth" entirely misses out a demographic willing to take risk with little or no capital or little or no income. I would encourage Osborne to read the US tax code on independent contractors and make contact with the Kauffman Foundation if he a) wants to encourage growth as the Kauffman Foundation clearly shows that entrepreneurs are the real drivers behind economic growth and jobs; b) encourage British people to take a different path from claiming benefits.
Renewable energy 
Wind industry players who were hoping for market signals and signs of encouragement from Osborne will be bitterly disappointed - UK energy ministers should also be disappointed with their chancellor, CharlesHendry in particular.
Osborne's budget simply doesn't play to the UK's strengths: the offshore wind potential is huge and with the European mainland still in financial crisis, the chancellor has missed a golden opportunity to attract investment from companies like Vestas, Gamesa and the countless wind developers looking to other markets. 
Osborne could have offered the UK as a safe haven investment opportunity amid the headwinds of the European debt crisis.
As Europe's common energy market approaches in 2014, the UK could have positioned itself as a major electricity exporter as Spain is already doing. But the 2012 budget was probably the last chance to send a clear market signal and allow the industry to mature.
Tax breaks for clean energy investments also would have been very welcome to attract inward investment and unlock the huge amounts of capital washing around the City of London, but always seem to end up being spent in another country.
Osborne would do well to read up in US tax credit incentives such as the Production Tax Credit for wind and the Investment Tax Credit for solar which drives the clean energy industry.
Osborne says he wants to make the UK the technology hub of Europe. Well, the UK is pretty good at this already, but Osborne's Wallace and Gromit film tax credit will be extended to video games, animation and TV programmes. 
That's a good thing. But a focus on digital services and products will hardly turn the UK into a technology hub and it's a tiny industry that could never grow to the scale or potential of the clean energy industry. Scant mentions and context of innovation indicate that Osborne hasn't really grasped the potential of technology to drive the growth so badly needed in the UK. 

Strong liquor over lunch at the Ivy and a topped up expense account for Soho media executives could have something to do with the direction of Osborne's fiscal affections when clean energy should have been a strategic focus for export markets that will only continue to grow.

I would prefer to be proved wrong with my reading of the 2012 budget, but if taxes are expression of the values of a nation (and its government), then George Osborne seems to be saying: I want to encourage established businesses to earn more by doing less, but everyone else has to do more for less in return. 
Osborne's unpopular budget might cost his party the next election because so little of it plants seeds for real growth - we'll have to wait and see how the economy responds. But those he was elected to serve could end up paying a much higher price for his oversights.

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