The Government abolished the exemption from the climate change levy (CCL) for renewable energy in the Summer Budget, with effect from 1 August 2015.
See our previous briefing, The End of LECs.
HMRC have now issued an informal consultation on a transitional period (for dealing with the issue of LECs in relation to renewable generation up until August 2015) and some FAQs on how the transitional arrangements will work. When read alongside the revised Ofgem FAQs, they give industry a clearer picture of how the exemption will work during the transitional period.
Length of transitional period
HMRC will be guided by industry on the length of the transitional period, but it is not expected to end before 31 March 2016 at the earliest. The complete withdrawal of the exemption will need further legislative changes to be made in the Finance Bill 2016.
In deciding the length of the transitional period, HMRC are asking questions such as how many renewable Levy Exemption Certificates (LECs) stakeholders currently have in their possession, how many further LECs they think they will get, how long it will take them to use up those LECs against their renewable source contracts, and what any anticipated shortfall of LECs to fulfil existing renewable source contracts will be. LECs will continue to be issued for electricity generated before 1 August 2015 in accordance with Ofgem's published timetable as follows:
Click here to view the table
What to do with the LECs
Following some mixed messages, Ofgem are now clear that they will not be issuing LECs at all for renewable electricity generated after 1 August 2015.
If stakeholders expect to have insufficient LECs to fulfil existing contracts, HMRC ask whether they intend to fulfil those contracts until they expire and pay the CCL due at the end of their averaging period; or end the contracts and begin charging CCL on renewable electricity supplies; or fulfil those contracts and acquire LECs (for electricity generated before 1 August 2015) to cover them.
If stakeholders expect to have surplus LECs, HMRC ask whether they intend to accept they may have unredeemed LECs at the end of the transitional period; or set up additional renewable source contracts throughout the transitional period; or make an onward supply to other electricity suppliers who may have a shortfall of renewable electricity.
The advice to public sector and business customers is to "speak to your supplier to see how your contract will be affected". Some suppliers might start passing on the CCL to their customers, others may not. It will presumably depend on what the contract provides and from what we have seen so far; contracts can vary quite a lot.
How to evidence that electricity is from a renewable source
Up to now, as well as being used for the purposes of the now abolished CCL exemption, LECs have also been used as a source of evidence that electricity from overseas comes from a renewable source, and as evidence that the electricity has been supplied in Great Britain. This is needed to fulfil Electricity Supply Licence Condition (SLC) 21.12(a) as part of the EU Guarantees of Origin (GoO) process. Going forward, Ofgem will need to amend its guidance on what alternative evidence is needed to prove GoO in the absence of LECs. This affects Fuel Mix Disclosure (FMD) requirements as well as FiT levelisation and the LCCC's determinations for Green Excluded Electricity under Contracts for Difference. See the Ofgem FAQs for more details.
Electricity utilities, in particular, are invited to respond to HMRC's consultation by 31 October 2015 and it gives them a real chance to shape the transitional arrangements, and the length of transitional period, to make the removal of LECs as painless as possible.