Renewables ruckus

Axing renewable electricity exemptions within the climate change levy will have far reaching implications for all players in the renewable energy value chain, right down to consumers says Jayne Harrold.

In a surprise move the Chancellor announced in his 2015 Budget statement last week that the climate change levy exemption for renewable electricity will be removed with effect from 1 August 2015.

This has implications right through the supply chain from generator through supplier to customer.  The interaction is complicated and involves legal and commercial considerations.  The straight application of the change in the tax law is the easy bit. Dealing with the consequences will be the challenge.

For generators, they currently receive levy exemption certificates (LECs) from Ofgem to certify that the power they have produced is exempt renewable power. These LECs have a value, although that value has declined recently and was forecast to decline further in the future. No LECs will be issued for renewable power generated from 1 August onwards. 

This means that renewable power installations will be missing one part of their income stream.  This impacts existing installations and will need to be factored in to investment decisions for new projects.

Suppliers have obligations to generate a proportion of their electricity from renewable sources. They pay the generators for the LECs, which of course, they will no longer need to do. The supplier then uses the LEC against supplies of renewable electricity that it makes to its customers.  The use of the LEC means that the supplier does not need to charge its customer climate change levy on the renewable electricity.

With the withdrawal of the exemption the supplier will need to apply climate change levy to those supplies of renewable electricity once the transitional period has ended. There are complicated commercial and legal questions attached to that. Contracts with customers can be long term and their terms can vary.

Suppliers will need to consider whether they can charge the climate change levy to their customer or not under the terms of the contract, whether the contract can be amended, and what the commercial consequences of applying the tax will be if the contract does provide for it.

For large industrial customers there is some upside. There are climate change levy reliefs that are available for certain energy intensive businesses. If those businesses chose to buy renewable electricity in the past then they could not access those reliefs because the electricity was exempt, but full payment for the LECs necessary to cover their supplies was necessary.

Withdrawal of the exemption means that an energy intensive business can now choose to buy renewable electricity and still access the tax relief.