E.ON blow leaves government's CCS strategy reeling

Anyone who reckoned the cabal of business leaders who wrote to the Daily Telegraph this week instructing George Osborne to continue full steam ahead with his cuts programme spoke for the entire British business community will have got a nasty shock this morning.

E'ON's announcement that it is pulling out of the government's Carbon Capture and Storage competition just two hours before Osborne is expected to announce that the government's CCS programme is to be cut back by around 75 per cent is mischievous in the extreme and makes it absolutely clear what the energy giant thinks of cuts to these critical infrastructure projects.

Inevitably E.ON and others in the CCS industry will attempt to downplay both the announcement and its timing, arguing with some justification that the decision is based on the economic case for CCS or falling demand for energy. After all they may still want to build a CCS plant in the UK one day and do not want to alienate anyone publicly.

But who are they trying to kid? The announcement could have been last week or next week or next month. Instead it has been timed to cause maximum embarrassment for Osborne and to give Alan Johnson a prime example of how the cuts threaten to undermine both UK industry and its low carbon ambitions when he gets up off the opposition benches this afternoon.

Some environmentalists will celebrate that the proposed coal-fired power plant at Kingsnorth looks like it will not now go ahead. But such celebrations will look worryingly short sighted, particularly given that the failure to build new coal plants with CCS only increases the likelihood of new gas-fired plants being built or the working life of current coal plants being extended.

What is most concerning is that E.ON's decision is precisely in line with what green businesses and environmentalists have been warning since the coalition took office.

Clean tech projects and companies will not wait for the government to make its mind up about policy, support mechanisms, investment, regulations and so on, particularly when other countries can offer greater clarity and funding.

E.ON evidently got tired of waiting to see if it would win the £1bn demonstration project, or if it lost the competition it could rely on a second wave of funding through a CCS levy of some form. It also must have got tired of waiting to see if the government would ever impose an emissions performance standard and if so what level it would be set at. Instead it is off to the Netherlands to build a pioneering CCS plant there.

It is a safe bet that E.ON used the bankers' gambit in its talks with the government: 'give us some love or we will pack up our bags and go elsewhere'. But whereas the government is happy to believe the bankers threats it tends to call the bluff of those industrial firms more used to getting their hands dirty.

Well, E.ON wasn't bluffing and now one of the central planks of the coalition's low carbon strategy is in serious danger of cracking.

We will have to wait until Osborne announces the results of his spending review this afternoon to see if E.ON's exit is in danger of becoming an exodus of clean tech investors.