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Operators and not owners of Combined Heat and Power (CHP) plants will be liable for Climate Change Levy, says Government

Operators of Combined Heat and Power (CHP) plants will be liable for the Carbon Price Support (CPS) rate of Climate Change Levy, according to draft Finance Bill legislation published by the Treasury. For non-CHP plants the taxable person is the plant owner.14 Dec 2012

Energy law expert Simon Hobday of Pinsent Masons, the law firm behind Out-law.com, said that it is not clear how the operator of the CHP will be defined, and it is unclear why an operator rather than owner criterion has been chosen.

It was also confirmed that, as announced in the 2012 budget (4-page / 59KB PDF), supplies of fuel to a CHP plant will be exempt from the CPS rate of Climate Change Levy, provided they are used to generate good quality outputs.

Plants with a generating capacity below two megawatts are exempt from the CPS but the operator of a CHP with a generating capacity above this level will be liable to account for the CPS rates of CCL on the proportion of deemed supplies of coal, gas or LPG used to generate electricity. It has now been confirmed that this limit will be applied to CHPs on a plant by plant basis, rather than being aggregated where there are multiple discrete sites.

"These changes are good news for CHP operators, and will ensure that CHP can continue to contribute to overall reductions in CO2 emissions" said Heather Self, a tax expert at Pinsent Masons.

It was announced in the 2011 budget that a Carbon Price Floor would be introduced on 1 April 2013. This introduces a new rate of Climate Change Levy, known as the Carbon Price Support (CPS) rate, on supplies of fossil fuel used in electricity generation, to complement the existing charge on consumers of energy.

The Carbon Price Floor is designed to "provide an incentive to invest in low-carbon power generation by providing greater support and certainty to the carbon price in the UK’s electricity generation sector." according to a Tax Information and Impact Note published by HM Revenue & Customs (HMRC).

CHP integrates the production of usable heat and power, meaning electricity, in a single plant. CHP stations are energy efficient in operation providing very significant fuel savings, and therefore offer cost and efficiency savings over conventional forms of electricity generation and heat supply. The overall efficiency of CHP plants can be as high as 80%, compared to Combined Cycle Gas Turbine plants at around 50% and coal-fired plant at less than 40%.  CHP can make an important contribution to securing cost-effective reductions in CO2 emissions, and is therefore given favourable treatment in relation to the Carbon Price Floor.

The Department of Energy and Climate Change’s CHP Quality Assurance CHPQA programme will be used to define a CHP unit. Simon Hobday said that this could cause some practical difficulties, "since the CHPQA boundary can change from year to year, at dates which will not necessarily be consistent with the end of an accounting period for tax purposes. Further liaison between HMRC and CHP operators will be needed to ensure that this proposal can work at a practical level."

The Government also announced that subject to the outcome of discussions with the European Commission over State aid, Northern Ireland will be exempt from the CPF.

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