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Like making apple juice pay an alcohol tax: clean energy faces carbon tax

Why has the Chancellor just whacked a great big carbon tax on renewable electricity?

When is a carbon tax not a carbon tax? When it’s a tax on zero-carbon things.

AppleThat might defeat its purpose of course, but only if your aim is to incentivise low-carbon energy. If your new aim is to undermine renewables and mount a tax-raid to make yourself look tough then it makes perfect sense. Obvs.

And indeed, that’s what the Government has just done by scrapping the exemption extended to renewables in the Climate Change Levy (CCL).

This gets a little complicated, but stay with me. I promise it will be worth it. I should also say that I might be wrong, and if so, please tell me, don’t just bad mouth me on Twitter.

In the beginning

In the early days of the clean energy market, before any renewables were really built, it came to pass that a tax on electricity consumption by large consumers (businesses, public sector and industry) was created called the Climate Change Levy. Heavy industry was mostly exempted. The overall purpose of the CCL was clear though – to lower carbon. Gordon Brown himself said its aim was to: ‘“… reduce carbon pollution by 1.5 million tonnes’.

In the middle

Then, as renewables began to grow it was felt that it would be sensible to provide an incentive to purchase renewable power, and to generate it. So it was decided that any business which bought ‘renewable electricity’ would not need to pay the CCL. To boost renewable generators, they were awarded a Levy Exemption Certificate (LEC) for each unit of electricity they produced, which they could then sell on to CCL-eligible businesses at a cost slightly less that the levy those businesses would otherwise have to pay.

This went on for many years, and became an accepted part of the revenue streams of renewable generators. Indeed, when the Government was working out what level to set the Renewable Obligation payments to renewable generators (a type of price support), it specifically included the sale of these LECs as one of their income sources. So nothing underhand. This was how it was meant to work. See below.

How ROCs are calculated

 

 

 

 

 

 

 

 

 

How ROCs are calculated – circled in RED

Still hanging in? No? Well basically a tax on energy consumption was introduced, and renewables were exempt. Let’s keep going.

Enter Osborne and the banana republic of renewables

Now this has all changed. The Chancellor of the Exchequer announced in his July 2015 Budget that this exemption awarded to businesses who bought renewable electricity will be removed. The carbon tax, amazingly, now applies to now just a tax on all electricity consumed. This means renewable generators will have no one to sell their LECs to.

Income no more. But income that they were told to expect.

By nabbing cash that would otherwise have gone to incentivise renewable energy, the Government thinks it will raise £450 million in the first year alone.

Their justification is that some of this money was going to pay for renewables in other countries. This is because the UK imports electricity through interconnectors and it is assumed that this contains large amounts of renewable electricity. The Government argues this is unfair, and perhaps it is, but it’s a relatively small amount of the total LECs (a maximum of 30%). Surely something that could have been easily dealt with in other ways?

Share prices falling, incomes reduced, community schemes hit

This shock change has two major impacts. It’s a retrospective swoop on existing renewables generators. And it could put off people from building renewable energy in the future.

Now companies that have agreed RO contracts will be earning about 5% less than they thought they would. That is not insignificant, particularly for small scale or community schemes which have the tightest margins. It could spell the difference between profit and loss.

You can see this in the fall of the share prices of some renewable energy companies. Infinis, which operates wind farms, is down 8% today (24 hours after announcement) to a record low.

FTSE

 

 

 

 

 

 

 

Share prices by Financial Times

Looking forward, anyone building new renewables in the UK will have to charge that little bit more for their power.

Companies which have recently signed up to develop renewables under the new support mechanism called Contracts for Difference, might be able to re-negotiate their deals, but they might not, and must surely be thinking about why they should bother with the hassle of investing in the UK market.

For a man who constantly whines about producing renewable energy – and tackling climate change – in the cheapest way possible, the Chancellor has just effectively put a carbon tax on carbon free electricity, which will mean fewer renewables and more uncertainty for the industry. At the same time of course he has announced additional tax breaks for fossil fuels and the drivers of gas guzzlers. If I didn’t know better I’d say there was a pattern.

Written by Alasdair Cameron, 9th July 2015

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