Summer Budget: Treasury delivers £3.9bn body blow to renewables sector

The Treasury’s decision to axe exemptions to the Climate Change Levy will come at multi-billion pound cost to renewable generators over the next five years.

Chancellor George Osborne said the move to scrap the levy exemption certificates (LECs), previously purchased by renewable energy customers, would protect taxpayer money benefitting renewable generators in foreign countries. But analysts said the government data suggested generators in the UK would bear the brunt of the cost.

The Treasury said it would target 90TWh of renewable energy to the tune of £5.54/MWh – figures that suggests all renewable energy consumed in the UK (where the overall total is 300TWh a year) will be included whether produced by local generators or not.

The budget statement said the move would be implemented as soon as August and raise £450 million in the current financial year, and £490 million in the 2016/17 financial year. In total, it could enable the Treasury to claw back as much as £3.9 billion in the coming five years.

Market specialists at Icis said that removing £5.54/MWh of revenue from onshore wind generators, for example, would represent as much as 5 per cent of earnings.

“Although 5 per cent may not sound much, it could substantially alter the existing power generation playing field, and have a noticeable effect on the energy mix of the future,” Icis editor Jamie Stweart said following the budget speech.

“Owners of proposed renewable power plants will now have to review their plans in light of this shift in project economics, while the profitability of existing generators – large biomass-fired power plants being the obvious example – will take a clear hit’,” Stewart added.

RBC Capital analyst John Musk said Drax is likely to take the biggest knock following the announcement, and estimated a 50p/share impact, while wind operating fund Greencoat could take a 2-3 per cent dent to its net asset value.

And the blow will ripple out from generators to suppliers and their customers.

“Suppliers will be affected as they will have entered into contracts to purchase exempt power. Large industrial and commercial consumers and suppliers will be most affected, [because] the removal will activate change in law in most contracts,” Edwards said.

Utilitywise head of energy markets John Ferris added: “[N]ew entrants to the UK business supply sector have been using LECs to gain an advantage in competitive tenders. In addition to the loss of LEC income to renewable generators, this change creates uncertainty regarding the costs for UK businesses.”

But the brunt of the impact is expected to be firmly on renewable generators, marking the second substantial blow leveled against the industry since the Conservative party won a majority in the May general election.

“In short, this will mean the UK burns more fossil-fuels to generate electricity, as opposed to using renewable power, than it would have done had the exemption remained in place,” Stewart said.

Renewable UK slammed the move as a “punitive measure” against the industry.

“The government had already announced an end to future financial support for onshore wind – even though it’s the most cost-effective form of clean energy we have. Now they’re imposing retrospective cuts on projects already up and running across the entire clean energy sector,” said Renewable UK director of policy Gordon Edge.

“Yet again the government is moving the goalposts, pushing some marginal projects from profit into loss. It’s another example of this government’s unfair, illogical and obsessive attacks on renewables,” he said.

The subsidy cuts for onshore wind through the Renewables Obligation scheme are expected to become law by the end of the week.