Government has announced that it will be removing the Climate Change Levy (“CCL”) exemption for electricity from renewable sources from 1 August 2015. This means that renewable generators will no longer be awarded Levy Exemption Certificates (“LECs”) from this date.

From 1 August 2015, there will be a transitional period where electricity suppliers will be able to supply CCL exempt electricity provided such electricity is covered by sufficient LECs. The length of this period is yet to be confirmed and will be subject of a consultation over the summer and autumn.

Background

The CCL was introduced in 2001 and is a tax imposed on the energy consumption of businesses and public bodies, designed to encourage energy efficiency. However, renewable sourced energy is exempt from this levy (provided the consumer had a renewable source contract with its supplier). In Great Britain, Ofgem issues LECs to renewable generators (1 LEC is issued for each MWh of electricity) which are then sold to licensed suppliers. Licensed suppliers then submit these LECs to Ofgem to reflect the amount of energy supplied to businesses and public bodies in respect of which the CCL exemption has been applied.

Government’s position

Of course, the primary cause for the change is a fiscal one. DECC estimates a saving of £450 million in 2015/16, rising to £910 million in 2020/21. In addition, Government estimates that one third of LECs are issued to overseas generators (who of course do not count towards the UK’s climate change and renewable energy targets) who export power to the UK via an interconnector. Government estimates that the support to these overseas generators would amount to well over £1 billion over this Parliament without any benefit to the UK or its consumers.

Government also believes that the value of LECs will be negligible by the early 2020s when the supply of renewable power will exceed business demand for CCL exempt electricity. This reduction in value may mean it is difficult for generators to factor the CCL exemption into financial models and investment plans.

Finally…

Given the pressures on the government to cut carbon emissions at the lowest cost possible, removing the CCL exemption may have seemed an easy win given its large cost (estimated by government to be £3.9 billion over this Parliament). This is especially true given the huge amount of money being paid to overseas generators, many of which will also be receiving renewable subsidies in their home country.

However, the effect on the renewables industry may be severe, with the loss of LECs costing generators at least £5 per MWh (albeit this figure would decrease over time). Many commentators are also concerned that the removal of the exemption will only further destabilise investor confidence in the renewables sector, with government’s announcement coming hot on the heels of its intention to remove renewable subsidies for onshore wind.

Time will tell whether this proves a shrewd move by government or is one step too far for a sector which remains so reliant on government subsidy.