UPDATE: UK Scraps Climate Change Levy, Confirms North Sea Support

LONDON (Alliance News) - UK Chancellor of the Exchequer George Osborne confirmed Wednesday that his previously announced financial initiatives to revitalise the UK North Sea oil and gas industry will go ahead, and also said he will remove the climate change levy in his first budget since the Conservatives won the UK general election in May.

In the first Conservative-only budget since the break up of the coalition government, Osborne confirmed that his previous pledges to help the UK oil and gas industry will go ahead as planned whilst he will scrap the "out-dated" climate change levy.

Osborne said he will remove the exemption that generators of renewable electricity have had from the climate change levy. Currently, tax is not paid on renewable electricity supplied to businesses and the public sector under renewable source contracts, regardless of whether it is generated in the UK or abroad.

"Now we have a long-term framework for investment in renewable energy in place, we will remove the out-dated Climate Change Levy exemption for renewable electricity that has seen taxpayer money benefiting electricity generation abroad," the chancellor said on Wednesday.

"This change will correct an imbalance in the tax system by preventing taxpayers? money benefiting renewable electricity generated overseas, and by helping ensure support for low-carbon generation provides better value for money for UK taxpayers," Osborne added.

The climate change levy was introduced in 2001 with the aim of improving industrial and commercial energy efficiency to reduce greenhouse gas emissions. It was originally put in place to encourage and increase demand for renewable energy.

"More effective policies have been put in place to support renewable electricity generation. These target support directly at renewable generators, whilst the climate change levy exemption seeks to support renewable generation indirectly through stimulating demand," said the government in a statement.

HM Revenue and Customs claimed the cost to the UK over the current parliament would be around GBP3.90 billion without action against the exemption, and more energy that does not contribute to climate change targets would be produced.

From August 1, the government will remove the climate change levy exemption for renewable-sourced electricity, but there will be a transitional period for suppliers from August 1 to claim the climate change levy exemption on any renewable electricity that was generated before that date.

"The government will discuss the details of this transitional period with stakeholders over the summer and autumn, to determine an appropriate length for it," Osborne said.

Following the chancellor's announcement, Drax Group PLC shares were down 18% to 288.50 pence per share on Wednesday afternoon. Drax is transforming itself into a predominantly biomass-fuelled generator, replacing coal, which would have benefited from being exempt from the climate change levey.

For the UK oil and gas industry, Osborne said his GBP1.3 billion of support for the industry before 2020 will go ahead as planned, as announced in March, and that a new investment allowance will be introduced alongside the reduction in the supplementary tax charge on oil and gas companies from 30% to 20%, which came into effect on January 1, 2015.

The rate of Petroleum Revenue Tax paid on older oil and gas fields also will be reduced from 50% to 35%.

These changes are expected to increase oil production by around 15% by 2019 and drive GBP4 billion of new investment over the next five years, the government claims.

"The large reductions in tax on North Sea oil and gas I announced in March are going ahead, and today we broaden the types of investment that qualify for allowances," said Osborne in his speech.

The government will broaden the application of the basin-wide investment and cluster area allowances to support investment on the UK Continental Shelf.

The definition of investment expenditure also will be extended to include certain discretionary non-capital spend and long-term leasing of production units. The allowance exempts a portion of a company's profits from the Supplementary Tax Charge.

That announcement saw the shares of companies operating on the UK Continental Shelf within the North Sea rise on Wednesday afternoon.

BP PLC were up 1.5% to 424.99p, Royal Dutch Shell PLC 'A' shares were up 3.1% to 1,807.00p, BG Group PLC shares were up 2.4% to 1,059.00p, BHP Billiton PLC shares were up 0.2% to 1,191.00p.

Centrica PLC shares were up 0.1% to 259.60p, and SSE PLC shares were up 0.2% to 1,544.00p. Premier Oil PLC was up 3.5% to 137.80p, Petrofac Ltd up 2.2% to 849.50p, Independent Oil & Gas PLC up 15% to 17.25 pence, Faroe Petroleum PLC up 2.1% to 83.75p, and Xcite Energy Ltd up 1.7% to 30.00p. Trap Oil Group PLC shares were down 8.3% to 0.321p.

By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance

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