UK chancellor Jeremy Hunt outlines energy security and tax plans

Autumn Budget included the creation of an energy efficiency taskforce, as well as reforms on Solvency II and a review of EU regulations.

In a highly anticipated speech last week, UK chancellor Jeremy Hunt (pictured) said that government spending would prioritise stability, growth and public services, following several turbulent weeks in which the nation saw severe market turmoil, political chaos and the death of its longest-serving monarch. Markets, businesses and households alike had been waiting to find out the latest government measures affecting wages, taxes, energy supplies, investment and green policy.

In a major U-turn in fiscal strategy, Hunt announced tax rises as well as spending cuts of around £54bn, running counter to predecessor Kwasi Kwarteng’s “mini” budget less than two months before, which had set out tax cuts of around £30bn. 

Among other areas, the government budget had an extensive focus on energy policy – targeting security, efficiency and net zero. Hunt confirmed the government would go ahead with the construction of a new nuclear plant at Sizewell C in Suffolk, saying: “Our £700mn investment is the first state backing for a nuclear project in over 30 years and represents the biggest step in our journey to energy independence.”

The government estimates the new plant, while subject to further approvals, will create 10,000 jobs and provide power equivalent to six million homes for more than 50 years.

Energy efficiency

Further details on the government’s energy independence plans and the launch of a new energy efficiency taskforce will be published by newly appointed business and energy secretary Grant Shapps.

No specific details or timeframe have yet emerged on the taskforce but Juliet Phillips, senior policy advisor at think-tank E3G, said it was a welcome tool and called for the group to be composed of a broad range of experts in the home retrofit space, including manufacturers and installers; as well as energy companies; fuel poverty experts; and consumer groups.

The taskforce is linked to the government’s target of a 15 per cent reduction in energy consumption from buildings and industry by 2030. Additional government funding of £6bn to reach the target would be provided, but only from 2025 onwards, which is set to be an election year.

While the government’s commitment to drive down gas use through increased energy efficiency has been applauded, reactions also say it was long overdue. “For too long the energy efficiency can has been kicked down the road by successive governments. Jeremy Hunt is taking a small step in the right direction – but he needs to run, not walk. We can’t wait until 2025,” said Polly Billington, chief executive of UK100, a network of climate-conscious local government leaders.

Philips added that supportive measures will be needed to drive progress, such as tightening minimum energy efficiency standards across different tenures, as well as plans to phase out fossil fuel heating and to ramp up heat pump deployment – considered essential for meeting reduction targets.

She also suggested that, since the stamp duty cuts announced in Kwarteng’s “mini” budget will remain in place until March 2025, there could be an opportunity to move to an energy saving stamp duty from April 2025. 

Net zero measures

The findings of a review into the country’s approach to deliver net zero by 2050 are also expected by the end of the year. Former prime minister Liz Truss gave MP Chris Skidmore this mandate, while also launching a new licensing round to permit oil and gas companies to explore the North Sea for fossil fuels. While these measures have been retained, the lifting of a ban on fracking has been reversed by current prime minister Rishi Sunak.

During his speech, Hunt also said: “Despite the economic pressures we face, we remain fully committed to the historic Glasgow Climate Pact agreed at COP26, including a 68 per cent reduction in our emissions by 2030.”

Margarita Pirovska, director of policy at the Principles for Responsible Investment, welcomed measures in the package supporting investor engagement on energy efficiency and green energy, but also said the government needs to move faster. “A 1.5C-aligned future requires a ‘whole of government’ policy approach towards net zero growth, with coherent, ambitious financial policy reform, matched by equally ambitious real economy policies – rather than fragmented measures,” she said.

In the budget statement, Hunt further extended and expanded the windfall tax on oil and gas companies, which Truss had opposed. It is now set to rise to 35 per cent from January 2023 and to stay in place until March 2028, rather than the previous 25 per cent levy until the end of 2025.

However, the windfall tax is not valid if no profits are made from extracting oil and gas in the UK. The Labour opposition has criticised the scheme, arguing it also allows oil and gas firms to claim tax savings on every pound invested in fossil fuel extraction in the UK. 

The government is also set to raise money from low-carbon electricity generators in the UK from January 2023, by introducing a 45 per cent levy on “extraordinary returns”. From April 2025, electric cars will also need to pay vehicle excise duty, a tax raised on owning and driving a car on UK roads.

While financial markets seem to find Hunt’s Autumn Statement much easier to digest than the “mini” budget, several issues remain outstanding – not least, what will happen to the spending plans after April 2025, when the country has a general election.

In its own assessment, the Institute for Fiscal Studies says that delaying all of the difficult decisions until after the next general election does cast doubt on the credibility of the current plans. While the UK government might have restored some of its tarnished reputation, it remains to be seen if the measures announced will be enough to spur growth in green industries while also avoiding a fall in living standards.

Changes in regulation

Meanwhile, regulatory changes set to differentiate the UK from the rest of Europe were some of the points raised that look set to impact financial services in the long run.

In the UK government’s consultation response to the review of Solvency II – the EU law that regulates primarily how much capital European insurers need to hold to reduce the risk of insolvency – it said it favours relaxing the rules on capital buffers for British insurers.

Philip Jarvis, partner and insurance lead at law firm Allen & Overy, said that overall, the divergence from the European regime will incentivise UK insurers to increase exposure to long-term assets. Although the government has had to engage with regulators to ease risk concerns and ensure regulatory tools are in place to protect policyholders, UK insurers have so far responded positively to the announcement.

Aviva CEO Amanda Blanc noted in a statement that the reform is estimated to allow the insurer to at least invest an additional £25bn over the next 10 years across UK sectors such as social housing, schools, hospitals and green energy projects.

“Removing branch capital requirements where the parent is assessed to be adequately capitalised makes the UK a more attractive place to establish a branch, and reducing and simplifying the burden of regulatory reporting is a no-brainer,” according to Roni Ramdin, Solvency II finance technical controller at RSA Insurance.

However, Allen & Overy’s Jarvis cautioned: “As ever, the real-world effect will depend on the specific implementation, the details of which are not yet available.”

In addition, Hunt also announced a major review of EU regulations, which were retained following Brexit. In particular, the UK government will look at which regulatory changes can be made in digital technology, life sciences, green industries, financial services, and advanced manufacturing to unlock further growth. A decision on this should be taken by the end of next year, Hunt said.

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