Inside the Budget's 'climate-shaped hole'

It is 24 hours since the emergency budget, and the renewable energy sector is in a state of dismay following the new Government's decision to remove the exemption for renewables under the Climate Change Levy (CCL).

Chancellor George Osborne announced that the Conservative Party will cut tax exemptions for the renewable energy sector

Chancellor George Osborne announced that the Conservative Party will cut tax exemptions for the renewable energy sector

Yesterday’s Summer Budget saw Chancellor George Osborne drop the CCL renewable energy exemption bomb: a move branded a ‘punitive measure’ which will leave renewable electricity generation eligible for the Levy.

The CCL - which has been in place since 2001 - allowed businesses and public sector bodies to source renewable energy under the exemption, valued at £5.50 per MWh. But when these changes come into effect on 1 August, this exemption will disappear, leaving many new schemes hanging in the balance.

And, by the way, Osborne also mentioned that oil and gas will continue to receive tax relief - at a cost to the Government of £10m in 2020/21 - with the Tories set to expand North Sea investment.

The Treasury has said the CCL exemption removal will save the Government £450m in 2015/16 and £910m by 2020/21. HM Revenue & Customs said, without action, the exemption would cost £3.9bn over this Parliament and one third of this value would go to supporting renewable electricity generated overseas.

And in a blog post published within the past few hours, Energy Secretary Amber Rudd said her Department wants to create "a simple energy tax system that rewards energy and carbon saving". She wrote: "We want to collaborate with industry and the wider green economy sector in the coming months to ensure we develop a framework for simplicity and stability." 

Share shock

But the CCL announcement has already had a tangible negative impact: share prices in Drax plummet 28% across the afternoon. The energy company had recently made changes to convert its major power station to biomass which would have been exempt from the levy. With the exemption removal, Drax expects its pre-tax profits to drop by £30m this year, and £60m in 2016.

Drax chief executive Dorothy Thompson said: “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.”

Drax is not alone. Renewable energy firm Infinis Energy - which has around 274MW of wind capacity and 315MW of biogas - also saw its shares fall by more than 8% this morning.

The changes have also hit small and growing energy sectors hard, with the anaerobic digestion industry body ADBA claiming the move will effectively cost the sector £11m per year, and risk future investment.

ADBA chief executive Charlotte Morton said: “This announcement comes as the industry is already facing uncertainty on a number of fronts given the imminent Feed-in Tariff review due and absence of confirmation that the Renewable Heat Initiative will be extended beyond March 2016.

“The UK needs renewable energy to keep the lights on and meet climate change targets. We are deeply disappointed that the industry was not consulted on this decision and remain concerned about the government’s real support for the green economy.”

'Punitive measure'

Maf Smith, deputy chief executive of industry body RenewableUK, told edie the policy announcements were not encouraging for the sector, adding to uncertainty following the end to subsidies for onshore wind. “All of this makes investors jittery, and understandably so,” said Smith.

The organisation's director of policy Dr Gordon Edge added that the end of CCL was a “punitive measure” against the renewable energy sector. “We’re suddenly looking at a substantial amount of lost income for clean energy companies which was totally unexpected. For example, Levy Exemption Certificates account for just over 6% of onshore wind generators’ revenues," he said.

Green group Friends of the Earth added that the move would make decarbonisation more expensive for the UK. “If there are problems with renewable companies which might not be low carbon – like some biomass projects – they can be dealt with separately,” said campaigner Alisdair Cameron. “But this blanket approach will only create more uncertainty, costing clean energy jobs and investment.”

Opposition parties have also chimed in on the debate. In response to the Budget announcement, acting Labour Leader Harriet Harman said the Chancellor had “pulled the rug out from investment in renewable energy.”

The raid on the renewable energy budget was also slammed by Green MP Caroline Lucas, who said there was “an enormous climate-shaped hole in this budget.” Lucas added: “In axing the Climate Change Levy exemption for renewable electricity and committing to further funding for road building, he’s putting progress on climate change in jeopardy.”

Road rage

The CCL wasn't the only green policy Osborne announced. The Chancellor also touched on plans to reform vehicle excise duty, ending the existing sliding scale for new cars and introducing a new flat rate for all vehicles other than zero-emissions cars.

The Budget document explains that most cars will pay a flat rate of £140, with cars costing more than £40,000 paying a £310 supplement for the first five years.

But again, this policy’s green credentials are questionable. The Low Carbon Vehicle Partnership (LowCVP) says it is concerned the changes would affect second-hand buyers and would disincentives adoption of low-carbon cars.

LowCVP managing director Andy Eastlake said the policy would encourage drivers to keep high carbon ‘gas guzzlers’ on the road. “Immediately stepping up to £140 provides little to encourage the use of plug-in hybrid or other promising low carbon vehicle and fuel technologies, all of which have a role in decarbonising our transport while providing the choice needed for users disparate journeys,” Eastlake said.

Paris and beyond...

So, two months on from the General Election, and the Tories have so far overseen a subsidy cut for onshore winda budget cut for DECC, the sale of the Green Investment Bank, and now an abrupt scrappage of the climate change tax exemption. Not much to cheer about, then.

But on a broader level, the official Budget document does give a small reason for optimism, with an important (albeit somewhat fleeting) mention of climate change. “The Government will push for a global climate deal later this year that keeps the goal of limiting global warming to 2 degrees firmly within reach,” it states.

And, with attention now turning to the UN Climate Summit in Paris in December - a summit widely-regarded as the most important in the history of human civilisation - Rudd reiterated her commitment.

"Climate Change isn’t just a threat to the environment," she wrote. "It’s a threat to our national security, to global security and to our long-term economic prosperity. A global deal is the only way both to deliver the scale of action required and to drive down the costs of climate action; so Paris 2015 is both a serious opportunity to avoid its catastrophic effects and to open up new avenues for low carbon industries."

Watch this space. 

Matt Field and Luke Nicholls


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