Heavy industry to get £100m exemption from low-carbon levy

Energy intensive industries will see their annual bills cut by £100 million under plans to exempt them from the majority of the costs of the contracts for difference (CfD) scheme.

Ministers expect the measure to benefit more than 130 companies in sectors such as steel, chemical, glass and cement. However, the costs will still be recovered through a levy on bills meaning the burden will be shifted to households and other businesses.

The new legislation being introduced by the government will enable eligible companies to avoid paying up to 85 per cent of the indirect costs of the CfD scheme.

The mechanism was introduced as a replacement for the outgoing renewables obligation and ensures that low-carbon generators receive a guaranteed price for the power they produce by providing top-up payments over the wholesale price. The scheme began operating in 2014 and the first payment to a generator was made last year. It is funded through a levy on customers’ bills.

In a response to a consultation on the proposed measure, the government said it is concerned that the added costs will put a major burden on energy intensive industries in the UK thereby “placing them at a competitive disadvantage with their international competitors and increasing the risk that companies may choose to move their production abroad”.

“These industries are worth £52 billion to the UK economy, support 600,000 jobs and produce essential products that people use every day,” said energy minister Jesse Norman. “That is why we have taken this action to support them.

“Although energy costs on average account for three per cent of UK business expenditure, there are 15 sectors where this reaches ten per cent.

“In addition to the support announced today the government is continuing discussions with the European Union about securing further exemptions from policy costs for energy intensive industries.”

To be eligible for the exemption, companies must operate in one of a number of sectors deemed to be energy intensive and show that their electricity costs amount to 20 per cent or more of their gross value added.

The Department for Business, Energy and Industrial Strategy (BEIS) expects the energy bill for a typical firm to fall by £200,000 in 2016/17 as a result of the measure, with the saving rising to £670,000 in 2023/24.

UK Steel director Gareth Stace commented: “With the introduction of this exemption, we move another step closer to the comprehensive protection from climate change policy costs our sector has long called for.

“The long-term certainty that the exemption provides is a hugely important element in delivering a more competitive business environment for steel makers in the UK, placing them on a more even footing with their EU competitors.”

However, the exemption is also expected to add £3,100 to the typical energy bill for businesses with medium energy usage in 2023/24, and £1 to the average household bill.

BEIS said it is consulting on similar exemptions from the costs of the UK’s other low-carbon subsidy mechanisms – the renewables obligation and the feed-in tariff. Energy intensive industries are currently able to claim a rebate on the costs of these schemes.

Tom Grimwood

This article first appeared on edie’s sister title, Utility Week

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