U.K. removes tax exemption benefiting renewable electricity

The U.K. government has announced it will remove the Climate Change Levy exemption for renewable electricity generated after Aug. 1. The move is expected to impact Drax and other renewable energy producers in the country.

Chancellor George Osborne made the announcement in his summer budget speech on July 8. During his speech, Osborne said now that the U.K. has a long-term framework in place for investment in renewable energy, the government will remove the Climate Change Levy for renewable electricity. According to Osborne, the exemption has seen taxpayer money benefitting electricity generation abroad.

Information published by the U.K. government explains that the Climate Change Levy is essentially a tax on energy collected from certain entities, including industrial, commercial, agricultural, and public service businesses. Certain businesses that use small amounts of energy, domestic energy users and charities engaged in non-commercial activities are exempt from paying the main rate of the Climate Change Levy on certain suppliers.

Electricity gas and solid fuel are normally exempt from the main rates of the Climate Change Levy if they won’t be used in the U.K, are supplied to or from certain combined-heat-and-power (CHP) schemes registered under the CHP quality assurance program, the electricity is generated from renewable sources, they are used to produce electricity in a generating station with has a capacity of 2 MW or greater, they won’t be used as fuel, or they are used in certain forms of transport. In his speech, Osborne indicated the government intends to remove the exemption for renewable electricity. 

Drax has issued a statement noting it is still assessing the impact of the announced change. However, the company’s initial estimate is that the removal of the Climate Change Levy exemption for renewable electricity will reduce its EBITDA by approximately £30 million ($46.09 million) this year and £60 million next year. Drax also noted that, as indicated by the U.K. government, the value of the of Climate Change Levy exemptions is expected to be negligible by the early 2020s. “We are surprised and disappointed at this retrospective change to a support regime which has been in place since 2001 specifically to encourage green energy and support renewable investment,” said Dorothy Thompson, CEO of Drax.

The U.K. Renewable Energy Association has also weighed in on the government’s announcement, noting it has concerns the removal of the Climate Change Levy exemption for renewable electricity will impact all renewable and low-carbon generation for its members.

While there was an issue with foreign generators benefiting from the exemption, the REA said the policy has also driven investment and has been factored into both original project finance decisions and current business plans. According to the REA, the change undermines confidence in the U.K. from the finance community and makes renewables less attractive when compared to fossil fuel generation. The REA added that the value of the exemption was worth £5.50 per MHW, and all financial assumptions have been based on that value.

“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,” said Nina Skorupska, chief executive of the REA.

“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,” Skorupska added.

The REA said it plans to call on the U.K. Treasury to rethink its proposal and is urging the chancellor to work with industry to address the problem of foreign generators without hindering the U.K.’s ability to meet our climate targets.