Summer Budget abolishes Climate Change Levy exemption for renewable energy

Yesterday's Summer Budget had a shock for the renewables industry as Chancellor George Osborne announced that the Climate Change Levy tax exemption for renewable energy would end on 1 August 2015, with a transitional period to be agreed with the industry. The rationale given for this is to correct an imbalance in the tax system by preventing taxpayers’ money benefitting renewable electricity generated overseas, but it will obviously impact UK renewables also.

This means that renewables power purchase agreements, where the purchaser often agrees to pay a premium to reflect the fact that renewably-generated electricity has until now been exempt from the Climate Change Levy (in practice through the power purchase agreement including a payment for the "Levy Exemption Certificates" (LECs) issued to renewable generators in respect of the electricity they generate), will need to be reviewed going forward.

The value of a LEC is around £5/MWh (linked to the current Climate Change Levy rate of £5.54/MWh) so not a major income stream, compared to, for example, Renewable Obligation Certificate values). Nevertheless, this is a change that will likely affect a renewable project's forecast income stream and possibly its ability to repay its debt.

All sellers and offtakers with a power purchase agreement will need to review their agreement to assess the impact of the Chancellor's announcement.

Responding on behalf of the renewables industry, Dr Nina Skorupska, chief executive of the Renewable Energy Association said, “The removal of the Climate Change Levy exemption for renewables will have a significant effect for our members immediately, and will undermine investor confidence by changing the stable market conditions needed for financing and business planning.

“If the intention was to remove the anomaly of international firms benefiting from the CCL exemption, this is a disproportionate action that now turns a measure designed to encourage low-carbon electricity, into just an electricity tax for business.”