In July's first Conservative budget since 1996, the removal of the Climate Change Levy (CCL) exemption for renewable electricity was perhaps the most controversial and unexpected announcement within the energy sector.
After all, it could appear contradictory that electricity generated from renewable sources should incur what is essentially a carbon tax.
This was followed by the announcements that tax on profits of older North Sea oil and gas wells would be reduced from 50% to 35%, and that a standard rate of car tax (£140) would be introduced for all cars with carbon emissions above zero (potentially dissuading drivers from buying low-emission vehicles according to a study by the AA).
Does all of this mean the government is now moving the goal posts on climate change?
The Chancellor, George Osborne, estimates that the removal of the CCL exemption will earn the Treasury £450m in 2015/16, rising to £910m in 2020/21. The other side to this is an unexpected loss in net income for green energy companies.
The largest affected organisation is arguably the Drax Group, operator of the Drax Power Station, which meets 8% of the UK’s energy demand. Drax has spent between £650m and £700m on converting coal-fired generators to burn biomass, with an estimated carbon saving of 12 million metric tonnes per year.
Biomass fuelled electricity generation, considered to be largely carbon neutral, was previously exempt from CCL - significantly impacting Drax's forecasted savings. Exemptions also account for approximately 6% of onshore wind generators’ revenue, providing a further indication of the financial impact this will have on the renewables sector.
George Osborne referred to a “long-term framework for investment in renewable energy [already] in place”, meaning the Contracts for Difference and Feed-in-Tariffs mechanisms in addition to the Renewables Obligation.
He also stated that the CCL has seen taxpayer money benefitting electricity generation overseas, as some renewable generators based abroad were eligible for exemption when electricity was consumed in the UK. These overseas generators were also benefitting from tax breaks in their source country, resulting in double-payment from the production and consumption of the electricity.
UK suppliers will now be required to pay CCL on taxable electricity supplies, which effectively means that a payment will be made to the government rather than an exemption payment to the renewable generators.
Amber Rudd, Secretary of State for Energy and Climate Change, stated that: “…we need to keep bills as low as possible… while reducing our emissions in the most cost-effective way”. She indicated that a higher than expected take up of Feed-in-Tariffs and advancements in solar technology have resulted in unexpectedly higher levels of electricity generation, higher green subsidies and, in turn, increased charges to consumers.
Whilst the government still appears to be supportive of the country’s obligations to reduce carbon emissions, it is clear that great importance is also being placed on reducing the budget deficit.
All YPO customers utilising the electricity framework should have received a letter detailing the options available now that renewable electricity has ceased to be exempt from CCL. If you have not received this communication or have any other queries please do not hesitate to contact us.