JULY’S budget saw the first retrospective cut to renewable subsidies yet seen in the UK, in the shape of the chancellor’s decision to remove the Climate Change Levy (CCL) exemption – a significant hit on UK renewable generators. The move will reduce their revenue by around £5 per MWh.
Taking the UK AD sector as an example, which currently generates roughly 2.2TW of electricity per year, the cut will impact it to the tune of £11 million per year. In onshore wind, Levy exemption certificates currently account for just over 6% of revenues.
The markets responded quickly and an almost immediate drop was recorded in the share prices for Drax – which fell by more than a quarter as analysts calculated the change would halve its earnings in the coming year – and wind farm company Infinis, whose shares fell by 8%.
Dorothy Thompson, Drax chief executive, 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 decisions.”
Why is the CCL being cut?
According to George Osborne, the change was intended to correct “an imbalance in the tax system” by preventing taxpayer’s money being used to benefit overseas renewable generators – who currently account for under 30% of UK renewable energy supply.
The rationale prompted both disappointment and bewildered head scratching from the renewables industry and its observers. John Musk, an analyst at RBC Capital Markets, suggested Osborne was using “a sledgehammer to crack a nut”. Nina Skorupska of the REA said: “If the intention was to remove the anomaly of international firms benefiting from the CCL exemption, this is a disproportionate action that now turns a measure designed to encourage low-carbon electricity, into just an electricity tax for business.”
Jerry Hamilton, business development director of renewables & energy solutions, Rexel Northern Europe, was also curious as to the rationale. “We can only hope that this truly is part of a wider plan which the government has claimed is a ‘long term framework’ for the UK energy infrastructure – and that this will be delivered quickly.”
“We must remember that, as a nation, we are at the risk of an impending energy crisis – with more power plants closing and replacements not happening quickly enough. Thus, we need rapid government intervention in order for us to safeguard our energy future and move a low-carbon economy along.”
Nick Molho, Executive Director of the Aldersgate Group, said the government’s understandable focus on tackling the annual budget deficit and the national debt “shouldn’t come at the expense of failing to support those sectors of the economy that are key to the UK’s long-term growth and competitiveness prospects”. He added: “With the global low carbon goods and services sector already worth US$5.5 trillion and international momentum building to accelerate cuts in carbon emissions, the UK economy can’t afford to drop out of the low carbon race.”
Dr Gordon Edge, director of policy with Renewable UK, said the measure was “punitive”. He said: “We’re suddenly looking at a substantial amount of lost income for clean energy companies which was totally unexpected.” It would, he said, push some marginal projects from profit into loss.
A Treasury briefing on the change acknowledged that “renewable generators in the UK could be impacted by the change in the short-term” but said they would have received “negligible” value from the scheme “by the early 2020s”.
John Constable, director of the Renewable Energy Foundation, said the change “would benefit the Treasury by several hundred million a year, and will reduce subsidies to renewables by a corresponding amount.”
Charlotte Morton, chief executive of the AD & Biogas Association (ADBA), 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.”
“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.”
Catherine Mitchell, professor of Energy Policy, University of Exeter, said: “The government says that it wants a sustainable, secure and affordable energy system, but recent rhetoric and policy changes are taking us further away from that goal.
“The ending of subsidies for onshore wind farms, our cheapest low-carbon electricity resource, the failure to exploit the potential of energy efficiency, the removal of the Climate Change Levy exemption for renewable energy, and support for unpopular fracking and extortionately expensive nuclear power does not add up to a credible energy policy. It reduces the chances of us meeting our various legal requirements, and presents serious political risk to investors, which in itself makes energy more expensive.”
Reprieve for the LCF
While the CCL cut was met with widespread ill-feeling in the renewables world, there was also a measure of relief that the budget had left other renewables subsidies intact. The Levy Control Framework (LCF) had been rumoured to be on the chancellor’s chopping block, its budget having ballooned over the period of the coalition government – it is now expected to reach £7.6 billion per year by 2020. But the full-scale review many believe is imminent was not included, nor even mentioned.
Osborne has declared a commitment to sending a strong message during November’s COP21 summit in Paris, aimed at tackling climate change. During the budget he said the government would use the summit as an opportunity to push for a global climate deal to limit global warming at 2 degrees.
A cut to the LCF would have clearly undermined this goal, as the CCL cut appears to have done. The Green Party’s Caroline Lucas said there was “an enourmous climate shaped hole” in the budget. “Ministers know that climate change presents a huge threat to our economy and national security – not just to public health and our environment. Yet George Osborne has refused to change direction and, 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 . We’ve seen yet another example of reckless short-term policy making that prioritises the profits of polluters over the public interest in a safe and habitable climate.”