Spring Statement 2019 – what to expect?

By Dr Jonathan Marshall, ECIU Head of Analysis

Were it not for political defections, backbench rebellions and (another) upcoming Brexit showdown, political eyes would likely already be focussed on what has traditionally been one of the highest profile days in the parliamentary calendar – the Spring Statement.

Expected to be a short, sharp, 20-minute update on the OBR’s latest forecasts for the UK economy, there is little chance of energy and/or climate policies making an appearance in next Wednesday’s announcement.

However, this does not mean that there will be nothing to look at. The OBR’s release will be as detailed as ever, with a number of figures worthy of attention.

This blog looks over three areas in which the OBR’s economic and fiscal outlook may give us some clarity on where national bean counters see energy and climate policy in the next five years.

Emissions trading

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The Chancellor disappointed many in 2017 by freezing support for renewable energy. Image: UK Government

As the final ‘fiscal event’ before Brexit, the Spring Statement offers the last chance for the government to outline how all things monetary will look when the UK is out on its own.

One area requiring immediate attention is the UK’s future participation in the EU’s emissions trading scheme (ETS). So far there have been suggestions that the UK is variously keen to stay in, set up a system that mirrors the ETS, or replace it with a flat charge on emissions.

Back in October, the government assumed that membership of the ETS would continue beyond March 29th, and that the sale of permits would bring in £4 billion over the next three financial years.

Revised higher by more than 100% from the previous forecast due to higher auction clearing prices, the loss of this income would represent an unwelcome hole in national finances.

The Spring Statement should allow us to see if Treasury expects ETS membership to continue; and if not, how it expects national receipts to be affected by the proposed shift to a flat £16/tonne fee should the UK leave without a deal.

The current ETS price is around £18/tonne, running the risk of the OBR seeing marginally lower receipts under the no-deal scenario.

A consultation on the future of UK carbon pricing is expected to be released a couple of days before Mr Hammond takes to the stage, giving the week beginning March 11th a real opportunity to offer some much-needed post-Brexit clarity.

Fuel duty

Exceedingly unlikely to be unfrozen, fuel duty is expected to remain at the level it has been at since 2010/11.

With the freeze having already cut Treasury revenue by £46 billion (and led to a 4% rise in traffic and extra 4.5 million tonnes of CO2 emissions), chances of a thaw in a Spring Statement expected to be very thin on announcements are low.

However, back in October the OBR forecast that fuel duties would continue to edge higher, topping out at £32 billion during the 2023/24 financial year. To do this, either fuel duty will need to be increased, or more fuel will need to be burnt.

An added issue here is the shift from hydrocarbon to electron-powered vehicles which - although great for the citizenry - is anticipated to cause a headache for Treasury, due to EVs' exemption from fuel taxes.

National Grid has doubled its forecasts of EV uptake in the UK, while the IEA has tripled its estimation of global EV numbers in 2020. With forecasts only ever being revised in one direction (more on that in a previous ECIU blog), it will be interesting to see if the EV revolution is feeding through into OBR five-year look-aheads.

Environmental levies

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Changing wholesale prices impact OBR projections on the cost of supporting low carbon energy. Image: Statkraft

Mainly made up of support for renewable power, the expected future costs of environmental levies were downgraded slightly in the October Budget.

Higher wholesale electricity prices (driven by rising fuel costs) reduced the ‘top-up’ needed to meet CfD strike prices.

However, since the last outing of Phil’s Red Box back in October, long-term wholesale power contracts have shed around 10% in value.

This, along with new wind farms performing better than expected and more capacity coming online via the next offshore wind auction, will likely result in forecast spend being revised higher.

The 2017 ‘Control for Low Carbon Levies’ forecast that the cost of support for renewables was set to peak in 2023/24. Eyes will be on the relevant section of the OBR document to see if this remains the case.

Front pages

So while there are few expectations of any heavy-hitting policy announcements, by diving into the detail it should be possible to gain a glimmer of insight into the future.

Carbon pricing and renewable support have been vital in the UK’s decarbonisation to date, with uptake of electric vehicles expected to have major ramifications in the future. Therefore it is likely that keen eyes will be on the detail when the OBR forecast lands on March 13th.