In a move which the Government said would save £3.9 billion over the lifetime of this Parliament, Chancellor George Osborne yesterday removed the current exemption for electricity from renewable sources from the climate change levy. 

In a policy paper published alongside the summer Budget announcement, HM Revenue & Customs (HMRC) said the move would affect generators of renewable source electricity (RSE), energy market participants and renewable  electricity suppliers.

The measure removes the exemption from the climate change levy (CCL) for RSE which is supplied to business or public sector consumers under the terms of a renewable source contract. Renewable generators overseas who export electricity to the UK will also cease to benefit from the exemption.

There will be a transitional period from 1 August 2015, during which electricity suppliers will be able to continue to exempt RSE generated before that date. This will be permitted if they hold sufficient renewable levy exemption certificates (LECs) that relate to that electricity and use them against supplies they make to eligible consumers. The length of the transition period will be discussed with regulators and affected businesses over the summer and autumn.

Renewable electricity has been exempt from the CCL since its introduction in 2001. The tax is not paid on renewable electricity supplied to businesses and the public sector under renewable source contracts.

HMRC said that since the exemption was introduced, more effective policies have been put in place to support renewable electricity generation which target support directly at renewable generators - unlike the CCL exemption which seeks to support renewable generation indirectly through stimulating demand. In 2015-16 alone the support for low carbon generators will be around £4.3 billion.

CCL exemption would cost £3.9bn over this Parliament and is not good value for money

HMRC commented:

“The government is committed to meeting its climate change objectives in a cost effective way. Without action the exemption would cost £3.9bn over this Parliament and one third of this value would go to supporting renewable electricity generated overseas. This electricity would not contribute to the UK's climate change or renewable energy targets. There is evidence that some of the suppliers receiving the exemption are already in receipt of subsidies in their own country. This does not represent good value for money.”

Removing the exemption will stabilise CCL revenues, maintain the price signal necessary to incentivise energy efficiency and also bring a significant simplification to CCL, HMRC said.

The CCL was introduced in 2001, to improve industrial and commercial energy efficiency and so reduce greenhouse gas emissions. It is a UK-wide tax on the supply of energy to businesses and the public sector, with separate rates for electricity, gas, solid fuels and liquefied gases depending on their energy content.

The CCL exemption for RSE was introduced from the start of the CCL, to increase demand for renewables from business consumers and so support the renewable generation sector. It works by UK suppliers acquiring electricity generated from renewable sources (whether domestically or overseas) and supplying it to business customers, with whom they must hold a contract that contains a renewable source declaration.

With effect from midnight on 31 July 2015, electricity generated from renewable sources will no longer be eligible for the CCL exemption for RSE when supplied under a renewable source contract.

Legislation will be introduced in the Summer Finance Bill 2015 to amend the Finance Act 2000 so that any RSE generated on or after 1 August 2015 is no longer eligible for the RSE exemption for CCL when supplied under the terms of a renewable source contract.

HMRC added that as CCL is not chargeable on supplies of electricity to individuals and households, the change should not impact on or increase domestic electricity bills. Removing the exemption is also not expected to impact on wholesale electricity prices.

HMRC - measure is "not expected to significantly increase energy bills"

As the business energy market is highly competitive, HMRC said that removing the exemption is not expected to significantly increase business energy bills. Energy intensive industries can already exempt themselves from 90% of CCL costs by signing Climate Change Agreements.

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.

The measure is also not expected to impact on the UK's renewable energy target. The government is on track to meet its ambition for at least 30% of electricity demand to be met by renewable sources.

Responding to the announcements in the Budget today about energy taxes, Professor Sam Fankhauser, deputy director at the ESRC Centre for Climate Change Economics and Policy at the London School of Economics and Political Science and the University of Leeds said:

“At face value, the Government has turned the Climate Change Levy into a type of ‘energy levy’ by removing the exemption for renewables. This change compromises the effectiveness of the Climate Change Levy as a form of carbon pricing which tackles the market failure resulting from the fact that the price of products and services involving emissions of greenhouse gases do not reflect the costs of climate change. This change will increase the costs for businesses that are supplied with electricity from renewable sources but will leave electricity from fossil fuel sources untouched.”

Shares in Drax, the power utility switching from burning coal to wood pellets, closed 28 per cent lower after the announcement. Two of the UK water companies, Thames Water and Yorkshire Water, have both recently signed long-term deals for renewable electricity with Drax-owned Haven Power. A number of the UK water companies are also becoming significant renewable energy generators in their own right.

RenewableUK, the trade association representing the wind, wave and tidal energy industries, has strongly criticised the Chancellor’s announcement.

RenewableUK’s Director of Policy, Dr Gordon Edge, said:

“The Chancellor’s announcement that renewable electricity will no longer be exempt from the Climate Change Levy is a punitive measure for the clean energy sector. Until now, Levy Exemption Certificates (LECs) generated as a result of the CCL have provided vital financial support for renewable energy producers.”

“The Chancellor says the removal of the exemption will earn the Treasury £450 million in 2015/16, rising to £910 million in 2020/21.

“We’re suddenly looking at a substantial amount of lost income for clean energy companies which was totally unexpected. “

“The Government had already announced an end to future financial support for onshore wind – even though it’s the most cost-effective form of clean energy we have. Now they’re imposing retrospective cuts on projects already up and running across the entire clean energy sector.

“Yet again the Government is moving the goalposts, pushing some marginal projects from profit into loss. It’s another example of this Government’s unfair, illogical and obsessive attacks on renewables”.

The Anaerobic Digestion and Bioresources Association (ADBA) described itself as “deeply disappointed that the industry was not consulted on this decision.”

As the detail emerged, the ADBA has calculated that the Budget’s smallprint includes an £11 million hit on the anaerobic digestion sector alone.

According to the ADBA, the removal of the Climate Change Levy exemption for renewables will reduce revenue by around £5 per MWh. For the 2.2TWh of electricity generated by the AD industry this will cost around £11 million per year, impacting investor and operator confidence.

ADBA’s Chief Executive, Charlotte Morton, commented:

“The claim that this change is to ‘correct an imbalance’ is misleading – only a third of the climate change levy goes to renewable electricity generated overseas.”

“The rest of the levy is currently spent supporting the UK’s renewable electricity market at around £5 per MWh, which developers took into account when putting their business models together. Without the exemption for renewable sources, the AD industry will lose £11 million in revenue each year – hurting existing operators and putting further investment at risk. “