World first proposed for Swansea Bay could increase government’s green credentials but chancellor is also offering subsidy for North Sea oil firms

This article is more than 5 years old

This article is more than 5 years old

George Osborne will use the budget to unveil an ambitious and costly plan to build the world’s first tidal lagoon to generate green energy.

The move comes alongside controversial measures to lower taxes for North Sea oil schemes in a bid to stem plummeting levels of UK oil exploration and production.

The government will announce on Wednesday that it is entering formal negotiations on funding a £1bn project to produce electricity from turbines in Swansea Bay, south Wales.

The Tidal Lagoon Power company will be offered the chance to discuss subsidies similar to the “contracts for difference” used on the planned Hinkley Point C nuclear plant in Somerset.

However, the project, which has the initial support of some environmental groups, is likely to generate its own concerns because it will need a subsidy of about £150 per megawatt hour (MWh) – compared with the £98 agreed for Hinkley and wholesale electricity prices of £50 per MWh.

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The final cost will depend on a range of factors, but proponents appear to have convinced the Department of Energy and Climate Change that if they can successfully build a prototype in south Wales, they will be able to roll out the concept much more cheaply at other locations as part of an eventual £12bn programme.

The Swansea Bay scheme envisages an area of 4.4 sq miles (11.5 sq km) cordoned off by a breakwater. It would have a generating capacity of 320MW with an annual output of 420GWh and a design life of 120 years.

Power would be generated as the incoming and outgoing tides – the daily equivalent of 100,000 Olympic swimming pools of water – passed through turbines.

The project would require a five-mile (9.5km) sea wall up to 20 metres high, but the Tidal Lagoon Power company says only a little more than half of this wall would be visible from land at low tide, with a few metres showing at high tide.

Osborne will also try to boost job and exploration prospects in the North Sea by changing the fiscal regime.

He is expected to introduce an investment allowance that could drive down taxes on some oil schemes from 60% to 30%. There are also hopes of a cut in the 30% supplementary tax charge on North Sea profits, which could reduce total taxes on some oil companies from 60% to 50% – still much higher than standard corporation tax.

Osborne used the autumn statement to make an initial cut to the North Sea supplementary charge – from 32% to 30% – but it was widely interpreted as being too little, too late.

There has been a huge drop in exploration off the Scottish coast, made worse by the halving of the oil price. Hundreds of jobs have been lost and there are fears that producing fields could be dismantled earlier than necessary.

Critics will argue that it is contradictory to cut offshore taxes as Britain tries to wean itself off fossil fuels to counter the effect of climate change. But the chancellor could point to the tidal lagoon plans as evidence of the government’s commitment to green energy.

The wider tidal plans include four more, even larger, lagoons with an overall capacity of 7,300MW – enough to meet 10% of the UK’s electricity needs.

The inclusion in the budget is a triumph for Ed Davey, the energy and climate change secretary, who has been pushing the Swansea Bay project in the face of initial scepticism from Osborne and the Treasury.

Davey believes tidal lagoons can provide another leg to a clean energy strategy involving solar, offshore wind and nuclear together with carbon capture and storage (CCS).

Facebook Twitter Pinterest Oil platform in the North Sea. George Osborne is to give subsidies to exploration companies. Photograph: Andy Buchanan/AFP/Getty Images

The tidal scheme is not certain to proceed. Even if the Swansea Bay scheme can secure firm funding, it will need planning permission. The application is with ministers and a decision is expected shortly.

An equally ambitious plan to build a Severn Barrage – linking the English and Welsh coasts – was debated for many years. There were concerns about the economic viability of the project as well as opposition during the planning phase from the RSPB wildlife charity and others. It was eventually halted.

Outlining the project for the first time last year, Mark Shorrock, Tidal Lagoon Power’s founder and chief executive, said it was essential to build more than one tidal lagoon: “Economies of scale bring immediate advantage. A second lagoon will require a lower level of support than offshore wind, for a renewable power supply that is both long-lived and certain.

“A third lagoon will be competitive with the support received by new nuclear, but comes without the decommissioning costs and safety concerns.”

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A second project would cost £2.3bn and be based in Colwyn Bay, with a third costing £4bn and located in the upper Severn estuary. Two more at a cost of £4.5bn would follow, on as-yet-unspecified sites.

Upfront money is expected to be raised through infrastructure funds run by Macquarie Group and other pension funds. The long-term cost of the project, however, will eventually come from energy customers through household fuel bills.