The government has claimed that businesses will not face significant increases in energy costs from its decision to axe the Climate Change Levy exemption for renewable electricity. Yet the move will likely increase costs to firms that use renewable energy by more than £5/MWh.
Removing the exemption was announced in today’s budget alongside a commitment from the Chancellor to review the policy mish-mash around energy taxes.
Simplifying the so-called alphabet soup of policies will be welcomed by industry, given that several carbon pricing instruments could probably be rolled into one.
However, removal of the CCL exemption will eat into the profit margins renewable generators and the Chancellor could be perceived to be disingenuous by suggesting it will not drive up energy bills for businesses given that contracts may now need to be renegotiated.
When the levy breaks
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. That means renewable (or non-carbon emitting) power is 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.
The impact on renewable electricity generators will mean they lose a significant single digit percentage of income, given that levy exemption certificates (LECs) are worth £5.41/MWh.
HMRC acknowledged that renewable generators would take a hit.
“Renewable generators in the UK could be impacted by the change in the short term. However the value they receive from the exemption is expected to be negligible by the early 2020s. Any short term loss will be minimal compared with the support expected to be allocated to renewable generators in 2015-16 alone,” it stated.
However, the removal of £5.41/MWh will have a knock on effect on the levels of government support afforded to renewables developers via contracts for difference. Those that bid for contracts under the CfD auction may now find themselves looking at a different economic picture.
Meanwhile, the market reacted to the news by dumping stock in some generators. Drax, which is converting its coal fired plant to biomass, saw its value plunge by almost a quarter within two hours of the announcement being made.