Economic | G Pontin

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Publications on economic topics

Budget 2016 – A budget for small business and savers

This year’s Budget is one that small companies should be excited about, the chancellor not only announced his intention to lower corporation tax to 17% by 2020 but also a raft of measures to shift support towards smaller businesses and savings.

Many will ask, why is such a shift important? SMEs make up a significant proportion of businesses and economic activity in the UK. The FSB estimate that small businesses accounted for 99.3% of all private sector businesses at the start of 2015. That is a lot of activity and economic potential that could be unlocked.

Whilst there have been some announcements that add costs of items such as the implementation of the National Living Wage, assistance to small companies during the transition until 2020 will help to relieve cash flow issues.

There were also new saving products in the budget with the launch of Help to Save and the lifetime ISA. These will be a welcome relief to individuals that have struggled to improve their financial position give the historically low interest rates.

Infrastructure was another potential beneficiary with the announcement of HS3, Crossrail 2, several road investments and extra funds for flood defences. Such investment is key to ensuring the economic potential of the UK in the future. Caution should, however, be urged. Whilst the commitment to these projects is sound progress the UK still struggles in the international rankings for its infrastructure and its investment levels are generally considered to be below where they need to be.

Below is a summary of the key announcements from the budget documents (click here)

Announcements

Permanently double Small Business Rate Relief from 50% to 100%.
Increase the threshold for the standard business rates multiplier to a rateable value of £51,000.
From April 2020, switch in the annual indexation of business rates from RPI to CPI
By 2022 local authority business rate systems will be linked to HMRC digital tax accounts
From April 2018, Class 2 NICs will be abolished
The government will reform Class 4 NICs
The introduction of two new £1,000 allowances for property and trading income.
From 6 April 2016, the higher rate of Capital Gains Tax (CGT) will be reduced from 28% to 20%, and the basic rate will be reduced from 18% to 10%.
A restriction of the amount of profit (in excess of £5m) that can be offset through losses carried forward.
Abolish the CRC energy efficiency scheme following the 2018-19 compliance year
The reform of stamp duty on commercial property
Increase the VAT registration threshold in line with inflation to £83,000 from 1 April 2016
A further £3.5bn of savings from public spending in 2019-20
Around £1.5bn investment in areas such as housing, schools and transport over the next three years
Increasing the personal allowance from £11,000 in 2016-17 to £11,500 in 2017-18
Increase the higher rate threshold by £2,000 to £45,000 in 2017-18
The devolution of power to school leaders, expecting all schools to become academies by 2020
Create a National Funding Formula for schools from 2017-18.
Invest £20 million a year of new funding in a Northern Powerhouse Schools.
A new soft drinks industry levy targeted at producers and importers of soft drinks that contain added sugar.
The ISA allowance will rise from £15,240 to £20,000 in April 2017
From 6 April 2017 any adult under 40 will be able to open a new Lifetime ISA. They can save up to £4,000 each year and will receive a 25% bonus from the government on every pound they put in
A new Help to Save scheme for those on low incomes
Increase the existing £150 Income Tax and National Insurance relief for employer arranged pension advice to £500
The delivery of 13,000 affordable homes by bringing forward £250 million of capital spending
Move to a more zonal and ‘red line’ planning approach
The new mandatory National Living Wage (NLW) will come into effect from 1 April 2016, set at £7.20 an hour for workers aged 25 and above.
The main rate of the NMW, which applies for workers aged between 21 and 24, at £6.95 from October 2016
An individual lifetime limit of £100,000 on gains eligible for Capital Gains Tax (CGT) exemption through Employee Shareholder Status
£300 million of funding to improve northern transport connectivity and is giving the green light to High Speed 3
The green light to Crossrail 2, supported by £80 million to help fund development
Deliver a 5G strategy in 2017
Launch of the second Roads Investment Strategy, which will determine the investment plans for the period from 2020-21 to 2024-25
Allocate a £50 million Pothole Action Fund for England in 2016-17
Boost spending on flood defence and resilience by over £700 million by 2020-21
£50 million for innovation in energy storage
Auction Contracts for Difference of up to £730 million this Parliament
Establish a new Broadband Investment Fund
Commit to the 750MHz public sector spectrum in bands under 10GHz being made available by 2022
New devolution deals with the West of England, East Anglia, and Greater Lincolnshire

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WPI – Mobile infrastructure

Graham Pontin as the Company Director and Senior Economist at GPontin Ltd and as a Associate of WPI was asked to support the development of innovative research for a client.

Where once the PC was the focus of internet activity, with low portability and slow access speeds, this is no longer the case. The internet in the last five years has truly gone mobile. With many activities that would have required a physical wired connection just a few years ago now carried out on the move, the development of 4G networks has shown what mobile data can do.

Using internet in the mobile world has also changed how consumers engage. Business Insider recently reported that, with more and more dedicated apps becoming available and consumers’ increasing willingness to go straight to the services they want, there are real questions over the long-term viability of the traditional search engine and web page model.

Mobile has also opened up a range of opportunities never before thought of. Combined with smart devices in the home such as smart TV’s, heating systems and white goods, consumers can now control their home from work, the cinema or shopping mall.

If you wish to commission GPontin Ltd to support your research please contact Gpontin on [email protected]

To visit WPI’s website please go to http://wpi-strategy.com/

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WPI – Northern Powerhouse

Graham Pontin as the Company Director and Senior Economist at GPontin Ltd and as a Associate of WPI was asked to support the development of innovative research for a client.

The Northern Powerhouse is at the heart of the Government’s ambitions to create a lower welfare, lower tax and higher wage economy, with growth spread sustainably across the whole of the UK.

If the Government is to achieve this, along with its ambitious aims in eliminating the deficit, tackling low skills, halving the disability employment gap and, ultimately, boosting living standards for all, firm policy proposals to make the Northern Powerhouse a reality will be needed.

If you wish to commission GPontin Ltd to support your research please contact Gpontin on [email protected]

To visit WPI’s website please go to http://wpi-strategy.com/

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Comprehensive Spending Review – summary

Today the Chancellor outlined in the Autumn Statement and Comprehensive Spending Review (CSR) projections for government expenditure in the next five years.

The biggest surprise announcement was that the proposed changes to the tax credit regime which were rejected by the House of Lords were scrapped in their entirety. Whilst this will be of great relief to many individuals the statement generally continued the recent trend of a reduction in governments share of activity within the economy.

It is important to understand the context and scale of the challenge the UK continues to face. The CSR document reveals that GDP growth is expected to be broadly consistent across the forecast period (up to 2020-2021) at around 2.4%.

Within the main components of GDP business investment is considered to increase significantly in the next few years, but items such as household consumption are expected to slowly cool over the period. There is also an interesting period in 2018 when general government investment shrinks by 1.6% on the previous year.
These figures are presented against a backdrop of the unemployment rate of just over 5% and inflation returning to the target rate of 2.0% by 2019. Public sector net borrowing in 2015-16 is expected to be 73.5bn falling to £4.6bn in 20187-19 before entering surplus. This results in government debt falling to 71.3% by 2020-21.

To put this in context central government gross debt interest will be £56.6bn in 2020-21 and therefore is bigger than all departmental Capital Budgets (Capital DEL) combined. This demonstrates not only the scale and cost of public sector debt but also highlights the importance of the government being able to finance such debt at a low cost.

A selection of announcements from the Autumn Statement (click here) are listed below:

International and defence

Funding of the Strategic Defence and Security Review in full.
Protects police spending in real terms over the Spending Review period.
Commits to meeting the NATO investment pledge to spend 2% of GDP on defence.
An additional £3.5bn to a Joint Security Fund to 2021 to increase spending on the military and intelligence agencies.
Invests £1.9bn in cyber security and £3.4bn in new counter terrorism activity.
Continue to spend 0.7% of national income on overseas aid.
Invest £290m in the BBC World Service.
Creates a new £1.3bn Prosperity Fund to assist the growth of emerging and developing economies.

Devolution

Significantly reduce the central government grant to local authorities.
Introduce a new council tax precept for social care.
Undertake the full devolution of business rates.
A real-terms increases to Northern Ireland Executive capital budgets.
A real-terms increases to Scottish Government capital budgets.
Consult on updating the Transparency Code to require all local authorities to record details.of their land and property assets in a consistent way.
Work towards further devolution deals with other major city regions.
Deliver a £12bn Local Growth Fund between 2015-16 and 2020-21.
Creating 26 new Enterprise Zones, including expanding 8 Zones on the current programme.
Spend £13bn on transport in the North over this Parliament.
Develop a longterm transport strategy for the region through the creation of a new Midlands Connect Strategic Board.

Health

The ringfence on public health spending will be maintained in 2016-17 and 2017-18.
Provide the NHS in England £10bn per year more in real terms by 2020-21 than in 2014-15.
Invest up to £300m a year by 2020 to fund new diagnostic equipment and additional staff capacity for cancer treatment.
Invest an additional £600m in mental health services.
Invest £10m in expanding the Healthcare Innovation Test Bed programme.
The creation of a social care precept to give local authorities who are responsible for social care the ability to raise new funding. This will work by giving local authorities the flexibility to raise council tax in their area by up to 2% above the existing threshold.

Pensions

Increase the basic State Pension to £119.30 a week.
The government will publish today its guidance for pooling Local Government Pension Scheme Fund assets into up to 6 British Wealth Funds, containing at least £25bn of Scheme assets each. This would enable them to improve investment into projects such as infrastructure.

Education

Protect schools funding in England in real terms over the Spending Review period.
The development of new loans for further and higher education, with almost £1bn expected to be lent by 2020-21.
The Spending Review reforms the funding system for health students by replacing grants with student loans and abolishing the cap on the number of student places for nursing, midwifery and allied health subjects.
Provide investment of over £1.3bn up to 2019-20 to attract new teachers into the profession, particularly into Science, Technology, Engineering and Mathematics (STEM) subjects.
The apprenticeship levy on larger employers will be introduced in April 2017 at a rate of 0.5% of an employer’s paybill. Each employer will receive an allowance of £15,000 to offset against their levy payment.
The government will establish a new employer-led body to set apprenticeship standards and ensure quality.
The government will create 5 National Colleges and will support a new network of Institutes of Technology across the country.
The government will lift the age cap on new loans to postgraduates from 2016-17 so they are available to all those under 60.

Energy

Over the CSR period the government intends on reducing the projected cost of green policies on the average annual household energy bill by £30 from 2017.
The extension of the Warm Home Discount to 2020-21 at current levels of £320m a year, rising with inflation.

Science

Protect the £4.7bn science budget in real terms.
A new Global Challenges research fund of £1.5bn over the next 5 years.
The government will subject to legislation introduce a new body – Research UK – which will work across the seven Research Councils.
Over £130m capital will be invested in Department for Environment, Food and Rural Affairs’ (DEFRA) science facilities.
The British Business Bank (BIB) will retain the £400m of additional funding for Enterprise Capital Funds that was announced at Autumn Statement 2014

Technology

Invest £1.8bn to digitally transform government services.
Invest nearly £1bn in the next generation of 4G communications network for the Emergency Services.
Invest £1.3bn to transform HMRC into one of the most digitally advanced tax administrations in the world, with access to digital tax accounts for all small businesses and individuals by 2016-17.
Consult on options to simplify the payment of taxes.
A new target to reduce the costs to business of tax administration by £400m.

Housing

The CSR caps the amount of rent that Housing Benefit will cover in the social sector to the relevant Local Housing Allowance.
limit Housing Benefit and Pension Credit payments to 4 weeks for claimants who are outside Great Britain, from April 2016.
Deliver 400,000 affordable housing starts by 2020-21.
200,000 Starter Homes which will be sold at a 20% discount compared to market value to young first time buyers, with a £2.3bn fund.
135,000 Help to Buy: Shared Ownership homes.
10,000 homes that will allow a tenant to save for a deposit while they rent.
At least 8,000 specialist homes for older people and people with disabilities.
Further reforms to the planning system, including establishing a new delivery test on local authorities, to ensure delivery against the number of homes set out in Local Plans.
Release public sector land with capacity for 160,000 homes.
Amending planning policy to support small sites, extending the £1bn Builders’ Finance Fund to 2020-21.
£2.3bn in loans to help regenerate large council estates and invest in infrastructure needed for major housing developments.
Invest £310m to deliver the first new garden city in nearly 100 years, at Ebbsfleet.
Extend the Help to Buy: Equity Loan scheme to 2021.
Higher rates of Stamp Duty Land Tax will be charged on purchases of additional residential properties with effect from 1 April 2016. The higher rates will be 3 percentage points above the current rates.

Procurement

Help forces to improve police efficiency by taking steps to drive down the cost of police procurement by up to £350m and encouraging greater collaboration.

Welfare

A real terms increase in spending on Access to Work, providing specialist IT equipment, or support workers.

Motoring

Introduce measures to end the right to cash compensation for minor whiplash injuries, and will consult on the details in the New Year.

Equality and childcare

A new £15m annual fund equivalent to the VAT raised each year on sanitary products will support women’s charities.
Doubling the free childcare entitlement from 15 hours to 30 hours a week for working families with three and four year olds from September 2017, there is, however, an upper income limit per parent of £100,000 and a minimum weekly income level per parent equivalent to 16 hours.
From 2017-18 will invest £300m to increase the average hourly rate childcare providers receive.
Provide at least £50m of capital funding to create additional places in nurseries.
Maintain in cash terms the Department for Education’s central children’s services budget.
Funding for universal infant free school meals will also be maintained.
The government will introduce the first ever national funding formula for schools, high needs and early years, so that funding is transparently and fairly linked to children’s needs. The government will launch a detailed consultation in 2016 and implement the new formulae from 2017-18.

Infrastructure

The government will publish a National Infrastructure Delivery Plan next spring, setting out in detail how it will deliver key projects and programmes over the next 5 years.
The government has increased its overall capital departmental investment plans by £12bn between 2016-17 and 2020-21.
The government will increase funding for the Renewable Heat Incentive to £1.15bn by 2020-21.
A second Roads Investment Strategy will be published before the end of this Parliament.
£250m to tackle the potholes.
Freeze regulated rail fares at no more than inflation (RPI) for the entire Parliament.
A £475m fund to which local areas can bid for money to pay for large local transport projects.
The government will commit up to 10% of shale gas tax revenues to a Shale Wealth Fund.
£250m for an ambitious nuclear research and development programme.
Allow Network Rail to sell assets and re-invest proceeds in rail infrastructure.
Privatise the Green Investment Bank with a sale expected to be concluded during 2016-17.

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IPPR – new report: European jobs and skills

Today IPPR released its latest overview of its European jobs and skills market report which was done in collaboration with The JPMorgan Chase New Skills at Work programme.

The report found that Europe continues to face significant challenges when tackling unemployment underemployment and inactivity. The effect of the recession is still being felt in many economies across Europe, with the erosion of many economies skills base which is vital for medium to long run economic growth.

Within this the report also highlights the contrast between different groups of individuals. For example:

The young needed enhanced support to transfer from an educational position to one of employment
More attention
Improving vocational training
Existing workers also need greater support to continually upgrade their skills
Supporting female participation in the labour market.

The key challenges they identified are:

Tackling the unemployment rate
Fighting youth unemployment
Boosting the activity rate
Strengthening education outcomes
Growing productivity
Increasing vocational education and training opportunities

Link to report:

To read the report in full please click here

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ACE and EngTechNow – The Retention Gap – What is it and how to tackle it

The Retention Gap, reveals in detail the cost to the engineering sector of losing senior staff and the impact to business effectiveness. This report shows that the UK engineering sector stands to lose up to £9.5 billion over the next ten years due to its failure to retain staff.

ACE has campaigned continually for stable and reliable investment decisions in the area of staff retention recognising that they can help businesses to reduce costs by committing to a continual professional development plan. This report shows the true costs that businesses face through staff turnover and why it is imperative that companies invest in the development of their existing staff.

It is important that businesses are able to simultaneously retain and acquire the talent they need for their future prosperity while protecting their productivity in the present.

To inform and calculate the retention gap this latest piece of research uses extensive data from almost a decade of ACE’s benchmarking service which measures over 500 metrics of a company’s performance.

The research reveals the cost to a company of losing a Salaried Partner/Other Director or Department Head is £13,491 whereas, an engineer cost is £5,128.

Whilst these figures do not seem significant when looking at an individual member of staff, if you then factor in that the industry has an annual average staff turnover of approximately 20% of its total workforce, these costs soon become significant.

With 1.86 million posts due to be filled in the next ten years these costs amount to a staggering £5.2 billion to £9.5 billion depending on the roles being filled and how they are filled throughout the decade.

Industry, however, does not only need to focus on the costs associated with losses at the highest level of their organisation. With an impending skills shortage, companies need to focus more on how they retain and develop staff as they enter and progress within the company.

Looking more specifically at the future skills being developed to satisfy the new requirements from within the industry, the cost associated with losing a senior technician is £4,908. For junior and graduate engineers, however, the equivalent figure is £2,912 and for entry-level technicians it is £2,820.

Apprenticeships and fair and open access to opportunities are high on the Government’s agenda and this report successfully addresses both issues. ACE’s Technician Apprenticeship Consortium has successfully shown what can be achieved through effective collaboration between companies, the professional institutions and the training sector.

Company websites:
http://www.acenet.co.uk/
http://www.engtechnow.com/

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ACE – Procurement landscape – Wider, challenging, and in need of reform

It is estimated that the UK Government procures £230bn of products and services per year, with items varying from simple purchases like stationary through to complex investment decisions such as construction.

The construction sector has long voiced its opinion about how efficiencies could be gained through procurement reform. Despite much research and many attempts, progress is still slow and inefficiency remains high.

This report is the first in ACE’s procurement series and takes a critical look at the investment process and procurement landscape in a more holistic way than previous reports/investigations. This landscape is then critically reviewed in light of company, client and individual behaviours and economic theory to try and establish where the issues relating to slow progress actually occur.

The procurement landscape as outlined covers not only the transactional process of buying but also the investment process from its inception through the client process, supply chain engagement and eventually to operation.

This first report aims to transform the language around the procurement debate to one of identifying areas for change. As such, this report suggests the next steps that should be taken into specific areas to ensure future progress is made.

Company website:
http://www.acenet.co.uk/

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Business Innovate – The Budget 2015; surprises and innovation

The final Budget before the election was always going to struggle to provide sizable giveaways with such tight public finances, but even so there were some interesting surprises.

The most innovative of these was the announcement of a Help to Buy: ISA, where for every £200 a first time buyer saves, the government will provide a £50 bonus up to a maximum bonus of £3,000 on £12,000 of savings. Many first time buyers are sure to welcome such a scheme.

Alongside this, was the designating of the first 20 Housing Zones outside London, and continuing to work with the other 8 shortlisted areas. The problem, however, remains that supply and demand simply are too unbalanced.

There were also a few measures that should help to boost employment opportunities for the young with the abolition of Employer NICs for under 21 year olds from April 2015 and continued support for apprentices. This alongside a rise in the personal allowance to £10,800 in 2016-17 should help to continue to reduce the tax burden on those entering employment for the first time.

There were also few interesting measures that are sure to receive less headlines but will help to transform and reduce the cost of administering government services. The Budget announced:

That following a successful trial, the government will implement ‘GOV.UK Verify’ which is a new way for people to prove their identity online when using government services.
The government will transform the tax system over the next Parliament by introducing digital tax accounts, removing the need for annual tax returns.

Such measures, have the potential if they are further linked in the future providing a truly seamless point of access for government services.

Finally, a number of specific investments were announced that the government hope will continue to improve the UK’s international standing as a leader in research, development and innovation. Such as:

£1 million to the Centre for Process Innovation to support innovation and knowledge transfer in the North East’s chemicals sector.
£14 million to invest in an Advanced Wellbeing Research Centre (AWRC).
A package of measures to improve the accessibility of R&D tax credits for smaller businesses.
A further £100 million in cutting-edge research projects through the current UK Research Partnership Investment Fund round.
£400 million for the next round of funding for cutting-edge scientific infrastructure.

Go to: http://businessinnovate.co.uk/

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Business Innovate – Autumn Statement: innovative steps that make difference

The 2014 Autumn Statement left little room for manoeuvre, the deficit is not as low as the government would like and the temptation for giveaways is significant. What can be said though is that whilst the deficit challenge remains, the focus on innovation and reform rather than grand gestures is a welcome relief.

I use to illustrate this point two particular measures announced in the Autumn Statement. The first is that of apprenticeships. The education system and tax system in reality does not encourage the knowledge and skills transfer that is possible between businesses and youngsters entering the labour market. Yet there has traditionally been a mix of mismatched and poor incentives to encourage limited business and individuals to undertake such schemes. This has now potentially changed.

The Autumn Statement announced that it was abolishing employer National Insurance contributions for apprentices aged under 25 on earnings up to the upper earnings limit. This in the grand scheme of spending is not a significant sum but the message and incentive is right. It encourages that transfer from education to work and helps to build a relationship between business and future potential employees and output. Such innovative thinking is long overdue with business craving practical skills to improve productivity.

The second measure that stands out is the reform of stamp duty. This tax has long created distortions in the housing market. It is well overdue for reform but the changes announced today should be part of a continued effort to reform the housing market to ensure that future generations are able to own their own home, which is of a reasonable quality, at an affordable rate. In this respect stamp duty is an issue because it creates artificial holes in pricing where buyers have to spend significantly more to reach the ‘next level’ of the ladder. It is no longer just the first time buyers that don’t have the capital but also the second movers. This is why such reform is so important and innovative. I would, however, also stress that this is only part of the solution. It is a demand side response where as in actual fact the UK suffers a supply side problem. This is why the measures to increase the degree of house building are welcomed but do not equate to anything near the 260,000 homes a year required to meet population growth.

So whilst the majority of this statement contains small changes there is some significant progress. It should, however, never be underestimated that the measures announced are actually the first steps to what are long needed reform.

Autumn Statement: Summary of other main points

TAX

Stamp Duty rates overhauled. Top rate now 12% on properties worth more than £1.5m effective from midnight Wednesday. There will be no duty on properties worth up to £125,000 then 2% rate on the portion up to £250,000 then 5% up to £925,000, then 10% up to £1.5m.

Higher rate income tax threshold to rise to £42,385 next year.

Income tax-free personal allowance to rise to £10,600 rather than the planned £10,500 next year, giving wage boost of £825 a year.

ISAs can be inherited tax free.

Fuel duty remains frozen.

People who die under 75 to be able to pass on annuities, tax free.

CORPORATE TAX

A so-called ‘Google Tax’ will introduce a levy of 25% on profits shifted abroad by multi-national firms. The Diverted Profits Tax aims to raise more than £1bn over five years.

Banks to pay almost £4bn more in tax over next five years, with profits which can be offset by losses for tax purposes to be limited to 50%.

Inflation-linked increase in business rates capped at 2% and discount for shops, pubs and cafes increased by 50% to £1,500.

SAVINGS

Limit on saving in New ISAs to rise to £15,240

DEVOLUTION & ‘NORTHERN POWERHOUSE’

Business rates for Wales to be devolved to Welsh Government.

Plans law to devolve corporation tax to Northern Ireland if the Northern Ireland executive shows it can manage the financial implications.

Investment of £250m in new advanced material science institute in Manchester with branches in Leeds, Sheffield and Liverpool. Tendering for new franchises for Northern Rail and Trans-Pennine Express to ensure modern trains.

EDUCATION

Government-backed student loans of up to £10,000 are to be made available for postgraduates.

TRAVEL

Air Passenger Duty for under-12s abolished from May 2015. Scrapped from 2016 for under-16s.

SAVINGS

A further £10bn of Whitehall efficiencies is planned while £5bn more is sought from crackdown on tax evasion and avoidance.

Public service pension reforms will be completed, saving £1.3bn annually.

SPENDING

NHS gets additional £2bn every year for frontline services. A £1.2bn investment in GP services will be paid for from foreign exchange fines.

Government spending £10bn less than forecast this year but warns the coming years will require “very substantial savings in public spending.”

PUBLIC FINANCES

Office for Budget Responsibility (OBR): Forecast 2014 GDP growth upgraded to 3% from 2.7%. 2015 forecast raised to 2.4%.

“Deficit is falling this year and every year.” Deficit now cut in half. OBR forecasts borrowing to fall from £97.5bn in 2013/14 to £91.3bn in 2014/15 (£5bn above annual target). Budget surplus of £23bn predicted for 2019/20.

Osborne says deficit reduction better than some predicted as welfare spending is lower and interest paid on national debt is considerably lower.

OBR predicts wage growth above inflation for the next five years.

Go to: http://businessinnovate.co.uk/

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ACE – Electricity Market Reform: Generating Results

Tariff costs, tariff types, and switching levels

Tariff rises continue to be of concern with the average dual fuel household bill rising from £1,057 in 2011 to £1,232 in 2012. These rises have been against a backdrop of low wage rate growth, employment uncertainty, and a general lack in consumer confidence, fuelling affordability concerns.

This report finds no evidence of regional pricing by the ‘big six’ companies, however, when analysing the differences between tariffs, it is found that the benefits of switching are relatively limited over time, with direct debit customers being the main beneficiaries. Looking at the rationale behind price changes, this report finds that the price reductions felt by consumers for direct debit tariffs are as a result of company’s pricing policies and not simply inflationary changes.

Energy trading, liquidity and self-supply

This report finds that over time there has been a shift towards short term, ‘spot’ trading with increased volatility and cost owing to the higher price that can be demanded on a short term transaction. These costs have then been passed onto consumers with little explanation from the energy companies or the regulator as to why increases in this kind of activity have been allowed to occur. Policy makers can no longer ignore such a shift, given the implications this has for affordability. As such, intervention is required to encourage more competitive, longer term trading on an open and transparent market.

There is also an increasingly vague view as to what the energy mix in the UK will be, creating uncertainty and holding back the investment the country needs. Whilst in theory, with the government remaining technologically neutral, competition should be encouraged. In reality it has created a situation where only the most certain of projects (those with the lowest financial, political and planning risk) progress, with all others prevented from progressing while investors continue to seek the right signals.

Consolidated Segmental Statements

This report analyses in detail the Consolidated Segmental Statements of energy companies and finds that the costs and earnings of the generation arms of companies varies more significantly than that of their energy companies supply businesses.

Economies of scale and efficiency are generally cited in favour of vertical integration in the energy sector, yet the analysis in this report calls into question whether the actual benefit is passed through the system to the consumer.

In some circumstances the results even suggest that costs move in opposite directions for the different divisions of energy companies (e.g. generation and retail/supply), demonstrating that pricing signals are not efficient and the system is not responding to them as would be expected. Part of the reason behind this may be that companies are responding to media pressures and attempting to control costs at one end of the system. This, however, fundamentally undermines price and investment signals within the market.

The analysis also calculates the ‘earnings’ premium that is applied as prices pass through the system. That is to say that if generators charge more to suppliers, suppliers in turn charge more to consumers. For every extra £1 a generator earns in profit, a supplier is also able to make an extra £0.57p, making a total increase for consumers of £1.57. Given that more than ‘base’ costs are passed onto consumers the case for vertical integration and the efficiencies it brings within the market appears uncertain.

The correlation between generators’ and suppliers’ weighted average costs shows that as the former’s average costs increase the latter’s average costs do not change significantly. This suggests two possible scenarios, the first being that the average weighted cost of generators has no bearing on suppliers’ average costs. Alternatively, supply businesses are able to hedge prices forward so effectively that they can absorb variations in generators weighted costs with little effect on their own. The second scenario is, however, questionable given the shift towards short term spot trading where it is more difficult to offset cost volatility.

International price comparisons and the effect of energy taxation

The UK is more or less exactly matching the IEA median for electricity prices, and has one of the lowest incidences of taxation on energy. As such, overall electricity prices in the UK may not be as overpriced as is feared. It also potentially indicates, that the UK is not proactive enough in reallocating resources from markets which are inefficiently accounting for the effects of climate change, pollution, and volatile prices, thus preventing movement towards a more stable and sustainable long term solution.

This report also compared the effects of taxation on the price of electricity and found that on average for every 1p increase per kWh in electricity taxes that occurs, there is also an increase of 0.53p in the electricity price. It should be noted, however, that this performance is significantly helped by Denmark, The Netherlands and Germany, where tax increases result in falls in electricity prices.
This compares with a rise of 7.4p per kWh in electricity prices for every 1p per kWh of extra taxes the UK government levies. This is also significantly more than any other country in the data sample below, with the next on the list (Ireland) experiencing an additional 4.3p per kWh rise for every extra 1p per kWh of taxation. The reason behind the UK’s poor performance in this area is likely to be that companies are ‘over insulating’ themselves against tax and policy changes, highlighting that long term policy certainty is key.

The evidence suggests that as the level of tax increases, so more investment takes place, the level and pace of research and development speeds up, and there is a lowering of long term costs, reducing the effect on electricity bills above and beyond the incidence of the tax.

The price of electricity in the UK on the ‘open’ market, i.e. not including tax, is one of the highest amongst the countries analysed. This is likely to be due to a lack of strategic planning as no one company considers investment in the UK as a whole at the macroeconomic level. As such, any investment outcome from the sector will favour individual companies’ investment strategies and not one that is efficient for the UK as a whole.

Policy – competition, EMR, CfD, capacity, price and consumers

This report suggests a way forward which attempts to balance the needs identified within the EMR framework, including:
The need for a policy which will secure a reasonable baseload and invest in solutions which can ‘store’ energy.
The need to address capacity issues without radically reforming policy again and therefore increasingly delay and uncertainty which is a major problem for investors.
Ways to improve and implement effective competition in the generation market by creating a secure base that lowers costs and allows technologies to compete where appropriate.
The need for increased transparency within the market, allowing the retail side to access and buy from a number of sources.

This report proposes that five Generation Investment Vehicles (GIVs) with a combined value of £8bn are created to ensure that in the short to medium term project finance is secured. In order to secure medium to long term investment to ‘lock’ long term cleaner energy into the UK’s generation system, this report also proposes that three Tidal GIVs (TGIVs) with a combined value of £21bn be created.

These vehicles could be used to finance for any type and combination of projects, for example:
Six CCGT plants at an approximate cost of £3bn (providing approx. 7,500MW).
Eight waste to energy plants at an approximate cost of £4bn (providing approx. 575MW).
£21bn of funds towards the building of tidal/lagoon assets (providing approx. 2,000MW to 3,000MW).
A £1bn fund for community projects, where money would be raised via crowd sourced funding.

The three £7bn TGIVs for example could finance:
The roll out of either smaller tidal schemes or more economically the construction of a Severn Barrage (with a target price of 16% below the current £25bn estimated cost) to lock in lower cost long term electricity not only for this generation but also the next few.

Introducing a secure supply has to be accompanied by increased transparency and ultimately improved competition within that part of the market where competition for variable electricity demand takes place.

This paper proposes a Priority Auction Mechanism (PAM) where:
A new structure of two open market traded exchanges where government has to purchase 50% of the capacity put forward in the first round, 75% in the second round, and all remaining capacity then having to compete OTC.
The first round of purchasing will be on contracts longer than 24 months, while the second will see providers enjoy contracts of longer than 12 months’ duration. This will have the dual impact of providing certainty of revenue for generators and encourage future investment whilst also encouraging a transparent and efficient pricing mechanism for the electricity market.

Company website:
http://www.acenet.co.uk/

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