Chancellor, Autumn Statement 2022

Long-term decisions on energy and climate left hanging following Autumn Statement

In his Autumn Statement, the Chancellor talked about economic stability, growth and public services. Yet many of the measures and long-term decisions needed to achieve these three ambitions – particularly in relation to energy and climate policy - were short on detail or were pushed down the road to a later date. More is required from the UK Government on how they plan to act now, as well as in the future, to ensure affordable and secure energy supply, promote sustainable economic growth and enable the fair distribution of costs and benefits in relation to the transition to a Net Zero future.

Roll-out energy efficiency sooner rather than later

The announcement on intended large-scale support of energy efficiency (with an extra £6bn of funding committed) accompanied by a new target to reduce energy demand by 15% by 2030, was welcome, and it is good to see Government recognising the contribution of such action to economic growth. However, it is less heartening that additional support will not kick in until 2025. The more that can be done earlier on energy efficiency across residential and business sectors, the greater the returns via energy security, economic growth and energy affordability, alongside stimulating competitiveness and productivity. Delaying action will not help people with the current cost-of-living crisis by reducing their energy bills. Instead, the Government is asking households to conserve energy. Yet many have already taken all the steps they feasibly can through reduced use of heating, lighting, cooking and transport services with potentially significant knock-on effects for health and wellbeing.

Ensuring affordable energy supply long-term

The current and persisting energy crisis means that households are already struggling with rising energy and food bills, with those on the lowest incomes being hit with larger increases due to the fact they spend disproportionately more on food and energy in their average basket of goods and services. Here, the announcements on the continuation of the Energy Price Guarantee (until end of March 2024), additional support for those on the lowest-incomes and that benefits will rise in line with inflation, were welcome and important in terms of providing immediate reassurance to households and controlling inflation. However, it is unlikely they will improve household budgets on where they are now. Particularly, taking into account the Chancellor’s extension of the freeze on personal tax thresholds until 2028. This means all households will be paying more tax, which, coupled with falling real-take home wages means that real incomes are falling as bills continue to rise.

Indeed, prices are rising across all goods and services, with rising energy prices being a key driver. Here the Chancellor did confirm a review of the existing Energy Bill Relief Scheme (ending in March 2023) but with little further detail on how support for business will continue. This support will be critical in fighting inflation, protecting jobs, sustaining competitiveness and stimulating economic growth.

Over the longer term, Government needs to be clearer on its plans to ensure affordable energy for both households and businesses. The extension of the Energy Profits Levy and the introduction of a new windfall tax on electricity generators (replacing the previously announced Cost-Plus Revenue Limit) will help foot the bill for the current energy crisis. But this does not get to the heart of the problem. What is urgently required is reform of the regulation and frameworks of the energy market. If prices are determined in more competitive and efficient markets, we should see less of the extraordinary profit making of recent months. While behaviour in global markets for oil and gas cannot be easily resolved, certainly not by any one government, it is crucial to address the current problem of the wholesale price of gas having such an impact on the retail price electricity, where much of our generation mix is increasingly delivered at a lower cost. Moreover, the setting and uneven distribution of standing charges which are the fixed costs for supplying energy that apply to all customers but vary across regions (for a variety of reasons, including but not limited to, distance from central generation sites), and types of consumers (including those on prepayment meters) must be tackled.

Securing supply and stimulating growth and low-carbon markets

Strengthening security as well as affordability of supply, particularly against the backdrop of Russia’s war in Ukraine, is key. This means increasing the domestic supply of low carbon electricity production. However, the only new investment in this regard confirmed in the statement was around delivering more nuclear capacity through Sizewell C. There was little concrete detail on plans for onshore wind, next steps on carbon capture and hydrogen and other technologies such as solar or even alternative options for nuclear power (i.e., small modular reactors).

The Chancellor did identify five growth industries – digital, life sciences, green technology, financial services and advanced manufacturing – and there have been reports of a new industrial strategy. Securing supply and supporting green industrial activity could play a critical in driving growth, UK competitiveness and productivity and new markets for low-carbon products. These plans need to be fully integrated into wider economic decision-making with consideration given to how these opportunities can be exploited without exacerbating cost-of-living challenges and/or at the expense of ‘Just Transition’ or ‘Levelling Up’ ambitions.

Distribute the costs of the transition to Net Zero fairly

Ultimately, Net Zero, energy and climate policy that is fully integrated into economic policy decision-making and fiscal policy is critical to sustainable and more equitable growth, and to ensure that the costs and benefits of transitioning to a Net Zero economy are fairly distributed. Thus, the Chancellor’s decisions - for example, to impose taxes on electric vehicles from 2025 and review Carbon Price support - need to be viewed within the broader context of who pays and who benefits from these decisions and how fair shifts can be incentivised. For example, our research suggests that, for various reasons the electric vehicle rollout could trigger increases to the Consumer Price Index and electricity bills. The lowest-income households will be hit hardest hit in these regards, while being the least likely to directly benefit from the rollout of electric vehicles. Our research also suggests that extending carbon pricing across the economy could have negative consequences for those on the lowest-incomes, as well as for the competitiveness of UK producers.

It is crucial that the Net Zero Review deliver insight and intelligence on delivering an economically efficient transition. There was a lack of progress at COP27 on stepping up ambitions on action on reducing emissions, bringing real risks to economies and populations across the world. Here, the UK must ensure it not only gets on track with our nation’s net zero targets, but seizes competitive advantage in low carbon technologies and production, making the transition part of our economic growth plans, alongside ensuring affordable and efficient solutions ahead of many, and catching up with others. To do this, Government needs to take the lead in developing an integrated and detailed policy framework with sustained political commitment that people and businesses can confidently follow.

Image Credit: HM Treasury, flickr.comCC BY-NC 2.0