An outline of the recent changes
In addition to other, recent ministerial statements and consultations on renewable energy schemes the government stated in its summer budget that from 31 July 2015 electricity generated from renewable sources will no longer be eligible for Climate Change Levy (CCL) exemption.
The CCL was introduced in 2001 to encourage business energy efficiency and reduce carbon emissions. The renewable source energy (RSE) exemption has been in place from the outset to encourage uptake of RSE from business consumers and Levy Exemption Certificates (LECs) could be used in connection with RSE generated in the UK or overseas. Until now the exemption has functioned to provide stability and extra revenue for renewables projects, particularly those operating on narrow margins. The net value of a LEC is currently around £5/MWh - reflecting the 2015/16 levy rate of £5.54/MWh- thus representing a small but significant revenue stream.
The removal of the CCL exemption for renewables has been presented as part of an overall drive to find value for money and minimise costs across the board; the Government estimates that the removal will have a positive impact on tax revenues of £450 million in 2015/16, rising to £910 million in 2020/21. The policy paper states that one third of the costs of the exemption go to supporting electricity generated overseas, and therefore 'does not represent value for money'. However, the impact on UK companies will be significant; around 70% of the income generated by LECs went to UK-based energy producers. The removal of relief represents the loss of a significant incentive for investment in renewable source energy and will, for example, impact on schemes that included LEC revenues in the financial modelling for their Contract for Difference (CfD) bids.
Taxing RSE under a carbon-reduction tax scheme seems counterintuitive, given that the CCL was primarily designed to reduce carbon and encourage renewables. The loss of LECs, in tandem with other, recent or likely changes (such as the removal of the pre-accreditation mechanism) clearly signals that the government is withdrawing support for the renewables sector in favour of having the industry stand on its own.
These changes will have a significant impact, even on projects as large as the Drax power station in North Yorkshire. A spokesperson for the Drax Group has stated that the removal of LECs will cost it around £30 million for the remainder of 2015 and £60 million for 2016, causing Drax's share prices to fall to their lowest point since they began trading. More pointedly, RenewablesUK describe the policy as 'illogical and obsessive'.
There will be a transitional period for suppliers who have accumulated renewable source energy and hold LECs for electricity generated before 1 August 2015. The length and details of the transition period are to be finalised with regulators and Ofgem has produced some detailed FAQs regarding possible interim situations and how to deal with them.