Analysis: Always look on the bright side

We are living through the "most serious global economic turmoil for 60 years", according to Alistair Darling, the UK Chancellor of the Exchequer. In the face of that, Darling's task in the recent Budget was to restore confidence in the national economy. There were winners and losers, but the main winner was the energy sector, which reacted positively to announcements of 'green' measures - albeit with one or two caveats.

"These measures will greatly assist in increasing the viability and profitability of projects to ensure a larger part of the UK's energy requirements are sourced from wind, wave, tidal and solar developments," said Tom Sexton, team leader, Aon Renewable Energy.

Paul King, chief executive of the UK Green Building Council, welcomed the £375m support for energy efficiency schemes for homes, firms and public buildings, but said the Budget was a missed opportunity to put low-carbon buildings at the heart of economic recovery. "More could have been done to really make green refurbishment affordable and attractive to home owners, businesses and the public sector, in order to both cut carbon emissions and create green-collar jobs," he said.

UK exports have fallen 14 per cent and gross domestic product will shrink by 3.5 per cent for the year, but the Chancellor insists the economy will start growing again, forecasting growth of 1.25 per cent for 2010 and 3.5 per cent for 2011.

However, whereas the last recession to hit the US, and most of the developed world (which the UK narrowly avoided), was widely blamed on over-investment in the tech sector, particularly the telecoms and dotcom arenas, this time the government appears to be relying on investment in technology to lead the UK out of recession.

As widely trailed, Darling confirmed that the government will launch a vehicle scrappage scheme, beginning this month and running until March 2010. Motorists trading cars that are more than ten years old will receive £2,000 to help boost sales of new vehicles, which are generally more efficient.

The government also said it will allocate £405m to support the development of a world-leading, low-carbon energy and advanced green manufacturing sector in the UK. This will be channelled to the development of low-carbon technologies such as wind and marine energy.

Energy saving

The government claims that one million homes were insulated last year. This year's Budget includes an additional £375m to support energy and resource efficiency in businesses, public buildings and households over the next two years, and £70m for small-scale and community low-carbon energy intended to save around £60m in energy bills each year.

A total of £100m will be given to local authorities to deliver housing to 'higher energy efficiency standards'. An extra £100m is being made available to improve the insulation for 150,000 homes in the social sector through a Decent Homes programme in England, designed to save households on average £120 a year and cut CO₂ emissions by 120,000 tonnes a year.

Around 3,500 small and medium-sized businesses (SMEs) will get access to low-cost loans for energy-efficiency measures via £100m of funding for the Carbon Trust. Such loans are not widely known among SMEs according to a recent study by the Chambers of Commerce. There is also £65m of new funding for loans to install energy-efficiency measures in public buildings, delivered through the Carbon Trust Salix Scheme in England, supporting around 3,000 projects in schools, hospitals and other public sector institutions.

Small-scale renewables and community energy

Measures to support small-scale renewable energy technologies and community heating schemes are intended to help reach the government's target of 15 per cent of energy from renewables from 2020. An additional £45m for small-scale renewable electricity and heat technologies, primarily through the Low-Carbon Buildings Programme, will bring forward about 13,000 installations but this programme is seemingly only open to householders, community groups, public and non-profit sector applicants.

Additionally, ten communities look set to benefit from locally produced energy - but the government has yet to announce where these local projects will be based.

Furthermore, the government intends to foster the development of combined heat and power (CHP) by extending the Climate Change Levy (CCL) exemption for indirect sales of CHP electricity to 2023, subject to state aid approval. CCL rates overall will remain at current levels in 2010-11.

Offshore energy

The Budget also signalled an uplift in support for offshore wind investments that reach financial close between now and 2011 through increasing the Renewables Obligation banding for offshore wind projects meeting specified completion criteria if they place new orders before 2011. This is expected to generate sufficient energy for 2.8 million homes.

Four billion pounds of new capital from the European Investment Bank through direct lending to energy projects and intermediated lending to banks was also announced. However, a pre-Budget report by the British Wind Energy Association suggested that the bank lending for onshore and offshore wind projects had seized up, and the devaluation of the pound against the euro had led to increases of up to 30 per cent on the price of turbines. This has let some commentators to speculate that the new funding will only bridge the gap for current projects.

Derrick Parkes, energy tax partner at KPMG, believes the green measures will close the energy gap. He said: "The uplift in the Renewable Obligation and the European Investment Bank funding will help bring forward major wind-farm and other much-needed green energy projects."

Carbon Capture and Storage (CCS)

The government intends to invest in research into the process of capturing carbon dioxide from fossil fuel combustion and storing it instead of releasing it into the atmosphere. The government will allocate £90m to fund companies to undertake detailed preparatory studies for CCS, and put in place a mechanism to deliver between two and four demonstration projects. Crucially, £60m of this money will be diverted from existing transport budgets.

"Gas storage projects have had a fillip with confirmation that cushion gas injected into a gas store will qualify for plant and machinery allowances," commented Parkes, who believes that these measures will encourage development in the North Sea oil and gas industry.

Darling predicted the recovery will be led by investment in "low carbon, advanced manufacturing and communications" technologies, which, in the future, may be as important to the economy as the financial services sector.