Britain’s clean energy transition: Clean technology investment

Since February 2022, there has broadly been a unified front among free and open nations against Russia. Although Berlin has consistently dragged its heels on support for Ukraine, it has so far bowed to pressure when it is applied. The Group of Seven’s (G7) price cap on Russian oil appears to be achieving its goal, with the Kremlin’s oil and gas revenues (which currently make up around 40% of its federal budget) expected to fall by 23% in 2023. 

As well as sanctions, falling oil prices due to the rise in alternative sources of energy, especially renewables, spells trouble for Russia in the long term. Europe has sped up its transition to cleaner energy to replace Russian oil and gas through various European Union (EU) level programmes such as REPowerEU. Meanwhile, in August last year, the United States (US) passed its Inflation Reduction Act (IRA), which is supporting its energy transition away from fossil fuels to the tune of $391 billion (£316 billion).

However, January has been marked by outcry from European countries, including Britain, against the US. European leaders accuse the US of protectionism, offering large tax breaks for clean tech companies to move their operations to America. Clean tech is now the fastest-growing investment sector in Europe, but the EU is planning on suspending its own state aid rules through a new Net Zero Industries Act (NZIA) to compete with the IRA. Although certainly not part of the coalition, it is worth remembering that the People’s Republic of China, the world’s second largest economy, already represents every dollar of two spent globally on the energy transition.

Table 1: Advanced manufacturing production tax credit provisions in the Inflation Reduction Act of 2022 (H.R. 5376, 117th Congress 2021-2022)

Despite being the first major economy to set a net zero target and being widely regarded as a leader in the ‘green space’, the United Kingdom (UK) is currently at severe risk of falling behind. Competing with the US in a subsidy war would be near-on impossible already, but recent policies put in place by His Majesty’s (HM) Government have made the situation arguably even more difficult. 

There was irresistible pressure on the administration of Boris Johnson, previous Prime Minister, to hit the oil and gas sector with a windfall tax given the extraordinary revenues that producers in the North Sea were experiencing. But, as well as making the North Sea a much less attractive place to invest, it inevitably led to demands for a similar windfall tax on electricity generators, including renewables.

The Energy Prices Act was passed at the end of last year, following the collapse of negotiations between HM Government and energy companies on ways to delink the wholesale price of power from gas by moving all generators onto a Contracts for Difference scheme. It took extraordinary powers to implement the Electricity Generators Levy, which is a 45% tax on ‘exceptional receipts’ (anything above £75 per megawatt hour) that began on 1st January and is set to last until March 2028.

Worse yet, unlike the Energy Profits Levy (EPL), which is levied on oil and gas producers, renewable electricity generators do not receive an investment allowance. Although reduced from 80% to 29% in the Autumn Statement, the investment allowance within the EPL provides a tax break for investment to enhance the life of existing oil and gas fields in the North Sea, or open up new ones. Despite the maturity of the North Sea basin and HM Government’s energy security strategy relying much more heavily on nuclear power and renewables in the long term, they do not currently receive the same treatment.

Regardless of the debate over the fairness around such a tax, the fact is that it is, combined with the IRA and the upcoming NZIA, already threatening a flight of financial capital from the UK’s clean energy transition. This should be incredibly concerning to HM Government: renewables offer the cheapest, and now most secure, source of power. Indeed, between 1st October 2022 and 20th January this year, the Energy Climate and Intelligence Unit found that renewables provided the same amount of energy contained in 83 liquefied natural gas tankers.

Britain is in a fortunate position as it possesses a great deal of Europe’s on and offshore wind potential due to its geographical position. Clearly, it will always be a somewhat attractive place to invest, especially given the expertise. However, there is a serious danger of losing parts of the supply chain to other countries, and slowing down the transition to a cleaner, cheaper, more secure energy system, if HM Government does not align its fiscal policy with its wider net zero, energy security, and levelling up objectives.

Despite being the first major economy to set a net zero target and being widely regarded as a leader in the ‘green space’, the UK is currently at severe risk of falling behind.

HM Treasury should urgently reconsider the signals it is sending to the market in the upcoming Spring Statement, which will be being formulated now. It should provide capital allowances to electricity generators covered by the EGL in return for continued investment in the UK, to match the investment allowance under the oil and gas EPL. Likewise, it could also consider extending what qualifies for the 29% EPL investment allowance from oil and gas fields to renewable energy production capacity, transmission, and storage.

The race to secure strong market shares of clean industries that are already growing exponentially is well and truly on. HM Government is currently risking surrendering its advantage in certain sectors, most of all renewable energy, to others due to its backwards fiscal policy. This risks blunting Britain’s global economic competitiveness, missing tremendous opportunities for growth in areas outside of London, and slowing down the transition to a more secure and sustainable energy system. It should take urgent action to correct course.

Jack Richardson is James Blyth Early Career Associate Fellow at the Council on Geostrategy. He is also Climate Programmes Manager at the Conservative Environment Network.