The Government is very much aware of the need to move the UK towards a low carbon environment, but at the same time is also concerned at the impact of cost and change to consumers whether domestic or commercial. Furthermore, requirements and markets have changed dramatically in the last fifteen years or so since policies were first introduced and it also recognises that.
The notice from HMR&C states that the exemption during this parliament would cost £3.9bn, with one third of this amount going to overseas suppliers who also claim exemption in their own countries. Therefore, in effect, £1.3bn would be wasted. Conversely, measures already in place will ensure that support is given to the low carbon transformation during 2015-16, totalling around £4.3bn. Analysing such statements is difficult but it does seem apparent that the government is seeking to simplify the overall taxing and funding structures for the industry.
Moving ahead, a longer term and more equitable strategy is required. Yet, we shall always have the challenge of balancing cost against sustainability against security of supply against carbon reduction!
The Climate Change Levy (CCL) was set up to tax UK business users for using any form of energy at the time of supply. In April 2001, an exemption to CCL was announced to exclude certain renewable energy sources and Combined Heat and Power (CHP) plants. The tax penalised all energy sources apart from the very small proportion that was able to achieve the “renewable” status. In recent years, the structure has supported the increased use of renewable energy. However, the subsidies given were then indirectly supported by those that did not receive them and, as the availability of renewables was set to increase, so too would the imbalance on subsidy distribution.
So, the announcement from the Chancellor in his Budget speech on 8th July that the exemption would be removed with effect from 1st August caught the industry by surprise. Furthermore, because there is still not a full plan in place some six weeks later, there is uncertainty in the market as to how such contracts can be unravelled and how new renewable based contracts can be offered in the future.
The decision to abolish the exemption has been taken, but the plan to implement it has not yet been devised! Remembering back to 1989, as we moved towards the opening up of the electricity market set for 1st January 1990, one cannot forget the almost amusement when the announcement came through that the date had been postponed to 1st April 1990! The minister responsible had been embroiled in a personal domestic crisis and had not been able to meet his deadline. A colleague quickly took over and promised to have something in place by April, which he did.
Perhaps, with hindsight, it is no surprise that fifteen years on we are still working on the plan and supposedly hoping that EMR will finally achieve what we had hoped for back in 1990. So, before any change is announced, there should be a sound plan of implementation.
Today, suppliers are working to clarify the situation to their customers, depending upon the type of contract they have, but in effect, it now seems that there are limited choices for new “green energy contracts” as such being offered. The exemption was set to start on 1st August and so all renewable electricity generated before this date will still qualify for the exemption, but thereafter there will be no concessions.
Individually, suppliers are reacting differently depending upon their respective portfolios, but whatever they offer in the short term, on existing contracts, will be undermined later as each has to accept the change in legislation and apply the CCL tax across all energy sources at the rate today of 0.554p/kWh. They have no choice.
As an example, EDF has stated that a fixed price contact is still a fixed price contract and after adjustment to the cost components it seems that their customers will not be affected, although those that are purchasing on a flexible basis will no doubt suffer an adjustment later. Haven, on the other hand, has decided to make an adjustment in the unit cost to offer some compensation, but electricity generated from biomass will attract a slight premium anyway. The short term message here is that negotiations will need to take place with suppliers to reach an immediate solution.
In conclusion, there will be no effect to domestic consumers while energy intensive industries can already exempt themselves from CCL by signing Climate Change Agreements.
Written By- John Hall
