When is tax and spend not tax and spend? When it’s pro gas

One thing sitting with your nose pressed very close to a book of legislative clauses for three weeks is get you thinking about some of the more arcane bits of what is in front of you.  There are several  -ahem- fairly obscure bits of the upcoming legislation that I think are really going to cause trouble in the future, policy implications apart, which I may well set out for your delight in the near future, but for starters here’s a continuing puzzle about how capacity payments are going to be viewed in the Energy Bill.

Now I know I’ve been banging on about the Levy Control Framework  to limit spending based on levies on customers’ bills for some time, and more recently, pointed out that  in the Energy Bill structure, capacity payments  (that is, payments to ensure that people build enough non-renewable capacity in the future) are outside the levy control framework, whereas Contracts for Difference (that is payments to ensure that people build enough renewable capacity in the future) are inside, and will be limited by the allegedly generous £7.5 billion cap in 2020 (see some of my previous stuff on this here).

And indeed this is about the limit of information that we’ve been offered as the Bill has progressed in committee. Ministers just refer to the fact that one set of payments are inside and the other outside, as if they were part of the celestial fixed spheres.  But why should that be so? I have tried asking the top banana in the Department himself: here’s what happened when I quizzed Ed Davey about this in DECC questions in December

Me: Will the Secretary of State explain why he proposes in the Energy Bill to include contracts for difference that are raised from levies in the levy control mechanism, but to exclude capacity payments that are raised by levies from the same mechanism?

Ed: They are intended to do two separate things: contracts for difference are intended to stimulate investment in low-carbon energy and the capacity mechanism is about security of supply.

(Me: Doh, I know that. But why?  – That bit didn’t get asked, of course.)

The answer for Contracts for Difference might have been that they are the successors, at least in part to the Renewables Obligation and are clearly, according to the Treasury’s definition ‘tax and spend’. Here’s what DECC has said about the classification of the Renewable Obligation, and other levies to date:

‘The Office for National Statistics (ONS) has classified the cost of the RO as a tax and the money that is spent on renewable generation as public expenditure. The ONS are also considering the classification of FITs ([feed in tariffs] and WHD [Warm Home Discount], but based on the ONS’s rationale for its classification of the RO and an unofficial (and non-binding initial view offered by the ONS, the Government judges that FITs and WHD are also likely to be classified as tax and spend and so has provisionally included them in the public finance aggregates’.

So why not ‘provisionally include’ capacity payments in the same way? Maybe it’s because they don’t count as ‘tax and spend’? But wait a minute, here are some impact assessments, published by the department on various measures, including capacity payments, upon which my eye lights during the longeurs in Committee proceedings. As I’ve said before, Impact Assessments are usually very helpful and –necessarily – truthful documents when looking at what a policy means.  And sure enough, on the front page of each impact assessment on capacity payments, published and updated over three years, is the filled in form that has to accompany each document detailing the cost of options. And here’s a box you have to fill in headed ‘Measure qualifies as’ And the answer is…..’Tax and spend’.

capacitypaymentimpactassessment

So it is the same, and there isn’t any reason why it is outside the cap. Unless….aren’t capacity payments about building more gas plants? And hasn’t there been a recent Treasury-led ‘Gas Strategy’ appearing, which among other things envisages a radically expanded build of new gas plants? And would that maybe be stifled if the amount of capacity payment money were to be capped through the Levy Control Framework, as set out by the Treasury? I think the time-honoured rule of the unwritten British Constitution might be at work here, which is that ‘everything x is y , unless it isn’t’. This is clearly a case where ‘it isn’t’ which may be OK until the bills for capacity payments, already far more expensive than the cost of a strategic gas plant reserve start to mount up. At which point, I wonder if the Chancellor will have the nerve to ‘cap’ his own policy driver?

This blog piece was first published on the Utility Week blog

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One thought on “When is tax and spend not tax and spend? When it’s pro gas

  1. Dear Mr Whitehead, I haven’t looked through the whole of your blog, but wanted to let you know that ONS announced the classification of Feed-in-Tariffs (or specifically the generation tariff element) as an imputed tax and subsidy scheme in November 2012 (see http://www.ons.gov.uk/ons/rel/na-classification/national-accounts-sector-classification/classification-update—november-2012/monthly-update–november-2012.xls)

    This was not done with particular fanfair, you’ll see I am the named ONS contact on the classification updates ONS issues.

    If you wanted a discussion about the classification issues around energy policy, I’d be happy to have a discussion with you, if required! My phone number is 01633 455805.

    Regards

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