Energy intensive businesses to get help with costs of contracts for difference, says Government

A new consultation sets out proposed criteria for those businesses that would be exempted from a portion of the costs of new contracts for difference (CfDs), which are expected to be introduced by the Energy Bill from 2014. The Government has proposed using the same eligibility criteria used at EU level to determine which businesses will receive compensation for the indirect costs of complying with its Emissions Trading System (ETS), as well as the UK's own Carbon Price Support mechanism.

Environmental expert Fiona Ross of Pinsent Masons said that the scheme would ensure that electricity-intensive businesses would "remain competitive in the global economy" in the absence of similar policies being enacted elsewhere. The costs of the CfD scheme are expected to be passed onto consumers by electricity suppliers via electricity bills.

"It is well worth industry responding to the consultation; particularly as the Government's preferred option risks creating a 'cliff edge' scenario, where some sectors are eligible for exemptions from costs under EU ETS, the Carbon Price Support mechanism and CfDs, whilst others, with only slightly lower exposure in terms of costs, are eligible for no exemptions," she said.

"Companies will want to consider the costs of the policy on their electricity bills and ensure that they make representations in favour of exemption if they are significant and likely to affect competitiveness," she said.

CfDs are long term contracts that provide stable revenues for investors in low carbon energy projects. They will be made available for nuclear and CCS as well as renewable energy sources. It is expected that the costs of the scheme will be passed to consumers through their energy bills, although these costs will be capped under the Levy Control Framework.

The proposals would exempt industries with a total combined value to the UK of approximately £50 billion in turnover, employing 150,000 people, according to Government figures. The list of eligible industries is yet to be finalised by the UK and EU, but will include iron and steel manufacturing, the manufacture of certain chemicals and the paper industry, according to the consultation. To be eligible for the new scheme, a business would have to operate in a specified sector and be able to demonstrate that its carbon costs will amount to 5% of its gross value added (GVA) profit measure in 2020.

"In order to comply with EU rules on state aid any exemption would also have to involve an energy efficiency benchmark, require all beneficiaries to have signed Climate Change Agreements or pay at least 20% of the costs they are being exempted from," Ross said.

"The Government prefers the latter option since it would have less administrative costs compared to an energy efficiency benchmark, and it notes that most energy intensive companies have already entered into Climate Change Agreements in order to benefit from an exemption under the climate change levy. Its preference would therefore be to exempt eligible industries from 80% of the costs of CfDs, although it does put forward an option for a lesser level of exemption, which would see other consumers pay less in redistributed costs," she said.

The consultation also considers options that would exempt a wider range of businesses than those eligible for compensation under the EU ETS compliance scheme. One option it suggests is to extend the "5% test" to include CfD costs, as well as the costs of complying with the ETS and Carbon Price Support mechanism. It also proposes extending the partial exemption to more 'medium electricity-intensive' companies not covered by ETS support, which the consultation claims would "deal with the potential of a 'cliff edge' to a degree".

Another suggestion contained in the consultation is the option of a 'tapering' relief, which would give a wider range of industries varying rates of exemption relative to their costs. However, both alternatives carry more of a risk of "compensating companies for their costs without affecting their behaviour/investment considerations" compared to the Government's preferred option, according to the consultation. A tapering relief may also mean more administrative complexity and make EU state aid approval less likely, the consultation said.