The decision to tax renewable power under the Climate Change Levy will likely add tens of millions of pounds onto business energy bills, third party intermediaries have warned. They want the government to allow existing energy contracts to be honoured.
Utilitywise and Inenco, two of the biggest TPIs, told The Energyst that the Chancellor’s unanticipated move to end the exemption for renewable power under the CCL had created market uncertainty.
How the CCL exemption worked
Businesses have to pay for using fossil generated power under the Climate Change Levy. But if they use renewable power, the charge is not added to their energy bill. The CCL came into force in 2001 to encourage energy efficiency, and with it, the exemption, to encourage uptake of renewable electricity. It is essentially a carbon tax.
From 1 August, the exemption for renewable power will no longer exist after the Treasury announced it would be cut in last week’s Budget. That means renewable (or non-carbon emitting) power is now subject to a tax designed to penalise carbon emissions.
HMRC stated that scrapping the exemption will save £3.9 billion by 2020. However, it said that the move was “not expected to significantly increase business energy bills” nor “impact on wholesale prices”.
Energy intensive businesses “can already exempt themselves from 90% of CCL costs by signing Climate Change Agreements,” said HMRC.
“Prepare for an element of renegotiation”
Whether all suppliers would pass on the costs of the exemption onto customers is not yet clear, according to Inenco head of trading Stuart Lea, but he said pass-through was permissable given that it is a tax change.
Businesses “should prepare for an element of renegotiation” on prices as a result, said Lea.
Axing the exemption without notice or consultation had shocked the industry, said Utilitywise head of markets Jon Ferris, with suppliers now taking legal advice over the policy decision. He added that HMRC’s claims that ‘removing the exemption is not expected to significantly increase business energy bills’ was “demonstrably wrong”.
What will it cost?
The precise cost of the move is hard to quantify given that it does not affect all contracts and that discount rates vary by supplier, said Ferris.
“However, Treasury analysis suggests an impact of £450m in 2015/16. If an average discount of 5% applies across all business consumers, the increased cost would be over £20m,” he said.
The exemption will cease to apply from 1 August. However, Ferris called on policymakers to make sensible transitional arrangements to avoid wholesale disruption to business energy contracts.
“The uncertainty over the transitional arrangements means that suppliers may be able to use Levy Exemption Certificates granted post August for generation up to the end of July to satisfy these contracts, but we have already been made aware by suppliers that they are taking legal advice and cannot quantify the impact yet.”
Utilitywise, he said, “calls on HMRC to allow existing contractual arrangements to be met in full.”
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Time for high energy users to generate their own energy onsite and avoid CCL payments.
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