Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

Changes proposed to business exemptions

The UK government has introduced several policies to drive renewable energy growth to help meet low carbon targets.

However, these have also increased the price of electricity for consumers. To help the UK’s energy-intensive industry (EII) businesses – such as mining, chemicals, steel, engineering and heavy manufacturing – remain competitive in international markets, the government has implemented certain exemptions from Third Party Charges (TPCs) for selected renewable electricity subsidy schemes.

The government has now proposed to extend the exemptions to allow a greater number EIIs to avoid indirect charges for things such as policy costs. If the threshold is changed, it will not only impact those newly eligible, but will also have implications for energy costs for non-eligible and currently eligible businesses.

The EII exemption

EIIs were previously compensated by the government retrospectively for certain costs incurred in subsidising renewables. However, in the 2015 Autumn Statement it was announced that this would be changed to an exemption to provide EIIs with greater financial security in an effort to improve international market competitiveness, as energy costs make up a high proportion of outgoings for such firms.

Exemptions from three schemes were proposed, which are:

  • Contracts for Difference (CfD);
  • The Renewables Obligation (RO), which supports large-scale renewable electricity projects, and;
  • Feed-in Tariffs (FiT), which support small-scale renewables.

The CfD exemption was the first to come into effect and was introduced in December 2017. Exemptions for the RO followed on 1 April 2018. The FiT exemption is yet to gain State Aid approval. These exemptions can be claimed against up to 85% of an EII’s electricity consumption.

Businesses within heavy industry are currently eligible for exemption if energy expenditure accounts for more than 20% of total site costs (energy intensity). When it introduced the measures, the government estimated that those included could save around £100mn/ year on energy costs.

However, most UK businesses do not fall under the eligibility criteria and the cost of this scheme is effectively paid for by all non EII exempt electricity users, rather than by the government. This includes households and all other non-domestic users.

At the time the government estimated that non-exempt businesses would see an overall increase in their energy bills of between 0.2% – 0.6%, or from around £160 extra for an average small energy user to an additional £62,900 for an average large energy user over a 10-year period.

New government proposals

On 22 June the government launched a consultation on whether the eligibility for EII exemptions should be widened for the CfD, RO and, if introduced, FiT schemes. The consultation has called for views and evidence from a wide range of stakeholders.

The government decided to review the 20% exemption due to potential competitive distortions that it believes could have resulted from the current threshold, particularly for those within the same sectors. In order to address any distortions that have occurred, it has asked for evidence on whether the energy intensity threshold should be reduced to 17%, 15%, or 10%, or whether it should remain at 20%.

If the threshold is lowered, the cost of exempting more EIIs will fall on other consumers. Therefore, the government is also seeking views on how to minimise the extra cost burden for those not eligible.

Implications for businesses

If the lowest proposed threshold (10%) is adopted, up to 85% of electricity use for newly eligible industrial businesses would be exempt from RO, FiT and CfD policy costs. As a result, the government estimates that their bills will decrease by an average of £2.8mn/ year per business.

However, those not eligible for the relief schemes would see an increase in their bills to cover the revenue lost towards renewable subsidies. It was estimated that the average annual bill would increase by £300 for a small business, £12,000 for a medium-sized business and £110,000 for an ineligible business operating in an energy-intensive industry. Businesses currently eligible will also see a rise in their bills of an average of £17,000/ year.

This would add to already rising costs of energy for businesses. The latest government energy statistics have revealed that average electricity prices for non-domestic use rose by 7% between Q1 2017 to Q1 2018 and gas prices rose 4.2% over the same period.

Options to lower the threshold by either 17% or 15% would still benefit newly eligible EII businesses in the same way but would see a decrease in associated costs for those not eligible and those currently eligible.

However, the government has set out a proposal to mitigate costs for non-eligible users, which would see the amount of exemption (aid intensity) that a company receives tiered depending on energy intensity. So, aid intensity would remain at 85% for businesses with electricity intensity at or above 20% but decrease to 50% for those with electricity intensity of 15-19% and 35% for businesses with electricity intensity of 10-14%.

Head of Climate and Energy Policy at WWF-UK Gareth Redmond-King commented: “Whilst EIIS are important to our economy, they also contribute huge amounts of greenhouse gases to UK emissions. It is only right that they pay their fair share to support the building of the cleaner, greener energy infrastructure.”

However, Jeremy Nicholson, Director of the Energy Intensive Users Group argued the EIIs pay in other ways, such as through carbon costs and that the 85% limit would mean all companies would “still be making a contribution to renewable energy costs.”

The consultation also seeks views on how the operation of the exemption schemes can be improved and how the redistribution of money recovered from over-exempted EIIs operates. Views are invited until 7 September 2018.

Conclusions

This is part of the broader debate on the balance of fairness on who should pay for decarbonisation. It could have significant cost implications.