Has the UK’s Climate Change Levy lost all meaning?

19 July 2015 (Last Updated June 10th, 2020 16:02)

The UK's Conservative government has angered environmentalists and green energy companies by removing the exemption to the Climate Change Levy for renewable producers at less than a month's notice. What could explain this decision, and is this tax still worthy of its name when it penalises clean and dirty power plants alike?

Has the UK’s Climate Change Levy lost all meaning?

LCC

After five years of coalition government and at the outset of the first fully Conservative-run government since 1997, it is reasonable to speculate about whether UK Prime Minister David Cameron has come to regret his 2010 promise to lead the "greenest government ever".

Standing next to then-head of the Department of Energy and Climate Change (DECC) Chris Huhne and addressing the department, Cameron made it clear that tackling climate change was a top priority, and one of personal significance. "There is a fourth minister in this department who cares passionately about this [climate change] agenda and that is me, the Prime Minister," he said. "I mean that from the bottom of my heart."

What a difference five years make. Since that speech, which gave environmentalists and renewable energy producers cause for optimism, the "greenest government ever" seems to have missed few opportunities to drop green issues further down its priority list. It only took until 2013 for Cameron to move from his 'vote blue, go green' rhetoric to reportedly instructing ministers in private to "get rid of all this green crap".

Indeed, without the restraining hand of the Liberal Democrats as coalition partners, Cameron's new Conservative government has brought forward the date of the end of onshore wind subsidies, announced plans to cut DECC's staff budget by 90% over the next three years and reiterated its support for controversial shale gas fracking methods in spite of staunch local resistance.

Climate Change Levy: the end of LECs

Of all the measures and cuts announced during the Tories' 'emergency' summer budget on 8 July, perhaps the one announcement that proved most infuriating to greens and renewable advocates was the removal of the Climate Change Levy (CCL) exemption for renewable electricity generated for business users. The exemption will expire on 1 August 2015, less than a month after the announcement.



It's still early days, but from the party's manifesto and new DECC appointment, what should cleantech companies expect?.


Renewable producers have been exempted from this charge since its introduction in 2001 to support renewable investment. The exemption, provided through Levy Exemption Certificates (LECs), was worth around £4 per megawatt hour to clean energy producers, providing a much-needed source of extra revenue for renewable projects dealing with low margins.

In the summer budget document, Conservative Chancellor George Osborne described the change, which will net the Treasury around £900m a year by 2020, as a better deal for British taxpayers: "This change will correct an imbalance in the tax system by preventing taxpayers' money benefitting renewable electricity generated overseas, and by helping ensure support for low carbon generation provides better value for money for UK taxpayers."

Renewables buried under unforeseen costs?

Certainly, the removal of LECs fits with the wider money-saving manifesto of a party committed to cutting the UK's budget deficit at all costs. But the move has angered environmental campaigners and Green Party politicians, and affected clean energy companies virtually across the board.

On a fundamental level, it could be argued that the CCL is no longer worthy of the name if it's going to target low-carbon energy sources such as wind and solar power on the same level as coal and gas-fired plants.

As Friends of the Earth's senior economics campaigner Alasdair Cameron put it: "This is totally bizarre; making renewable electricity pay a carbon tax is completely counterproductive - like making apple juice pay an alcohol tax."

"Making renewable electricity pay a carbon tax is completely counterproductive - like making apple juice pay an alcohol tax."

HM Revenue & Customs has argued that "the value of the exemption going to support UK renewable generators is likely [to] be negligible by the early 2020s, when the supply of renewable electricity will exceed CCL-eligible business demand for it." The government also stated that the CCL will still incentivise energy efficiency in businesses.

Nevertheless, it's hard to escape the conclusion that LECs simply represented a soft target to help the government meet its deficit reduction aims. And given the time and expense required to get clean energy projects up and running, adding costs now will almost certainly have an impact down the line, as some projects will simply not get built as a result.

"We're suddenly looking at a substantial amount of lost income for clean energy companies which was totally unexpected," said RenewableUK's director of policy Dr Gordon Edge. "For example, Levy Exemption Certificates account for just over 6% of onshore wind generators' revenues...Yet again the government is moving the goalposts, pushing some marginal projects from profit into loss."

As losses go, one need look no further than Drax Group, operator of the massive Drax power station, which meets 7% of the UK's electricity demand. For years the operator has been in the process of converting three of its six coal-fired generating units to burn biomass, at a cost of £700m. Two of the three units due for conversion have now been upgraded, and in July the plant reached its 20 millionth tonne of CO2 removed from its operations. The company has said the removal of LECs will cost it around £30m for the rest of 2015, rising to £60m in 2016. Drax's share price tumbled by nearly a third the day after Osborne's budget announcement.

Meanwhile, Osborne's position that LECs have channelled taxpayers' money to foreign companies holds water, but the fact remains that more than 70% of the income generated by LECs went to UK-based energy producers. Surely, if addressing this issue rather than simple cost-cutting was the main objective, there would have been a way to cut overseas generators out of the scheme without throwing the baby out with the bathwater. As RBC Capital Markets analyst John Musk noted, in this case the government is wielding a sledgehammer to crack a nut.