Recommendation 64

HM Government Acknowledged

8. [Response provided by HMT] The UK will take a different approach and not engage in a distortive subsidy race. HM Treasury will continue to monitor the impact on the UK, and its response will be on an ongoing basis, as is appropriate, concluding later this year. 9. However, the Government expects that the capital allowances changes announced at Spring Budget—full expensing and the 50% First Year Allowance for special rate expenditure—will support green industries including low carbon energy generation. 10. The Skidmore Review recommended that HMT should review how policy incentivises decarbonisation, including via the tax system and capital allowances. In response to this recommendation, the Government set out that it will engage with industry to carefully consider how best to incentivise businesses to invest in green technology. This will help the Government to consider whether there is a case for doing more through the tax system or whether other levers are more appropriate. 11. Future decisions on tax are for the Chancellor, and any changes would be communicated at a future fiscal event. 12. The Government sets Contracts for Difference auction parameters to balance carefully the need to secure new low carbon electricity deployment with the cost to bill payers. The budget for Allocation Round 5 (AR5) was set to reflect the firm pipeline of eligible projects known at that time. Once National Grid ESO has assessed applications and provided the Secretary of State with a valuation of all eligible projects, he will have the opportunity to increase the AR5 budget to reflect more accurately the actual pipeline of eligible projects. The AR5 Administrative Strike Prices (the maximum price a technology can receive per MWh of generation) were published in December 2022 and cannot be changed for this round. ASPs are based on the department’s latest view of potential project costs and future revenues, which are consistent with cost assumptions in the upcoming 2023 Electricity Generation Costs report. The ASP Methodology, which sets out how ASPs are calculated, includes consideration of project costs. This methodology is reviewed before every CfD round. Work for Allocation Round 6 has already begun. The Government continues to engage with industry stakeholders to understand better their concerns about cost pressures, which are impacting the sector globally, not just in the UK. It is expected that the broad inflationary protection offered by the scheme’s indexation to the Consumer Price Index (CPI) continues to be an attractive aspect of the CfD compared to most other schemes. 13. [Response provided by HMT] The Government continues to provide considerable support for investment in renewables. Since March 2021, the Government has committed a total of £30 billion of domestic investment for the green industrial revolution. 14. As the committee notes, investors in low-carbon technology are able to deduct the costs of investment from their Corporation Tax liabilities. At Budget 2023, the Government introduced Full Expensing, which allows companies to write off 100% of the cost of qualifying main rate plant and machinery in the year of investment until March 2026. Companies investing in special rate (including long life) assets will also benefit from a 50% first-year allowance during this period. 15. The Electricity Generator Levy is an exceptional and time-limited measure, which has a fundamentally different design to the Energy Profits Levy applied to the oil and gas sector. 16. The EGL has been designed to leave generators with a share of the upside they receive at times of high wholesale prices which they can use to invest in the clean energy generation we need for the future. 17. Under the Energy Prices Act 2022, the Government took powers to allocate Contracts for Difference (CfDs) to operational low-carbon generators. 18. The Government is undertaking further work to consider whether this could help to limit consumer bills and support investment in low-carbon generation. The option to offer a CfD to operational generators is one of a series of options being assessed as part of the wider Review of Electricity Market Arrangements (REMA) in DESNZ. An update will follow in due course. 19. [Additional Input by DESNZ] Instruments like the Contracts for Difference (CfD) scheme make the UK an attractive place to invest in green industries. Over the last decade, the UK has developed a tremendous record for attracting investment into green industries through a range of financing mechanisms, policy and market frameworks and targeted public investment, and we are determined to build on this.