United Kingdom taxes and incentives for renewable energy KPMG Global Energy & Natural Resources.
Exemptions are in effect from the Climate Change Levy and EU Emissions Trading Scheme.
Long-term banded quota mechanism designed to support renewable electricity generation.
Tariff support payments for large-scale electricity generation from a variety of technologies.
Tariff support payments for small-scale electricity generation from a variety of technologies.
Long term tariff support payments for renewable heat generation.
In the Summer Budget 2015 it was announced that there would be a consultation on reform of the environmental tax regime, and in particular the administrative complexity and burden facing businesses. Any changes to legislation are expected to take effect no earlier than 2016 onwards.
The Energy Act 2013 brought in major reforms to the UK electricity market. The key market mechanisms relevant to this publication are Feed-in Tariffs with Contracts for Difference (CfDs) to give revenue certainty to investors in low-carbon generation and the Carbon Price Floor which imposes a fossil fuel tax.
The CfD for each low carbon generation technology is available from 2014/15, lasting 15 years for most technologies and is scheduled to replace the Renewable Obligation Scheme which is to be phased out for new projects by 31 March 2017.
The table below sets out the CfD strike prices for renewable technologies for 2014/15 to 2018/19 (with each year beginning on 1 April). Support will be paid based on net renewable electricity generated.
|All Prices in GBP/MWh||2015/16||2016/17||2017/18||2018/19|
|Advanced Conversion Technologies (with or without CHP)||155||155||140||140|
|Anaerobic Digestion (with or without CHP)||150||150||140||140|
|Dedicated Biomass (with CHP)||125||125||125||125|
|Energy from Waste (with CHP)||80||80||80||80|
|Geothermal (with or without CHP)||145||145||140||140|
|Large Solar Photo-Voltaic||120||115||110||100|
|Scottish Islands Onshore||N/A||N/A||115||115|
The first allocation of CfDs was conducted by way of an auction under which projects submitted a proposed price. Generally, the final strike prices agreed for the successful projects were below the headline strike prices set out above.
This requires electricity suppliers to source a specific percentage of electricity from renewable sources. Renewable generators receive Renewables Obligation Certificates (ROCs) for each MWh of electricity generated, and these ROCs can be sold independently of the electricity generated, allowing renewable generators to receive a premium to the wholesale electricity price. Where an electricity supplier has an insufficient number of ROCs to meet an obligation, it must pay an equivalent amount of British Pound (GBP)44.33 per MWh (2015/2016 rate, GBP43.30 per MWh for 2014/15) into a buy-out fund. This fund is used to cover the administration cost of the scheme and the rest is distributed back to suppliers in proportion to the number of ROCs they produced. There is a banded ROC mechanism whereby different renewable electricity technologies receive different levels of support according to their technological maturity and levelized costs (see table below).
|Co-firing (mid-range) *||0.6||0.6|
|Co-firing (high-range) *||0.9||0.9|
|Co-firing (low-range) with CHP*||1**||1**|
|Co-firing (mid-range) with CHP*||1.1**||1.1**|
|Co-firing (high-range) with CHP*||1.4**||1.4**|
|Co-firing of regular bioliquid||0.5||0.5|
|Co-firing of regular bioliquid with CHP||1**||1**|
|Co-firing of relevant energy crops (low range)
|Co-firing of relevant energy crops with CHP (low range)
|Conversion (station or unit)||1||1|
|Conversion (station or unit) with CHP||1.5||1.5|
|Dedicated biomass with CHP||1.9||1.8|
|Dedicated energy crops||1.9||1.8|
|Energy from waste with CHP||1||1|
|Landfill gas – closed sites||0.2||0.2|
|Landfill gas heat recovery
|Building mounted solar PV||1.5||1.4|
|Ground mounted solar PV||1.3||1.2|
Source: Department of Energy and Climate Change website
*Includes solid and gaseous biomass and energy crops
**These support levels are only available in circumstances where support under the RHI is not available
***Five ROCs subject to 30 MW cap at each generating station. Two ROCs for any additional capacity added above 30 MW cap
The government had previously confirmed that applications for the RO regime can be made for new generating capacity until 31 March 2017, thereby extending the scheme until 2037. From 2027 the Department of Energy & Climate Change (DECC) will fix the price of the ROC for the remaining 10 years of the RO at its long-term value, and buy the ROCs directly from the generators to reduce volatility in the final years of the scheme. Renewable generators may not receive a CfD and also participate in the RO regime.
However, in July 2015, the Government announced that following consultation the “grandfathering” of the ROC payments will not apply for new generating capacity from biomass conversion and biomass mid-range and high-range co-firing projects from December 2014. It also announced that it was consulting on ending the ability of new solar projects of under 5 MW total installed capacity to claim support under the RO scheme from 1 April 2016, effectively ending the RO scheme for such projects a year earlier than previously announced.
CRC is a mandatory carbon emissions reporting and charging mechanism for large public and private sector organizations in the UK.
Participants in the CRC need to measure and report their electricity and gas supplies annually, from which the carbon dioxide content is calculated. The organizations are then required to buy an amount of carbon allowances to cover their carbon emissions, either from the Government or on the secondary market. For 2015/16 an allowance for one tonne of CO2 varies between GBP16.10 and GBP16.90. Allowances bought earlier in the year (based on forecast emissions) are cheaper than those bought towards the end of the period under the “comply or buy” sale mechanism.
Various rules on exemptions exist depending on overlaps with EU ETS and Climate Change Agreements (CCAs) which provide a partial exemption for some organizations from paying CRC providing sufficient reductions in carbon footprint are achieved through interventions made by the business and the relevant industry sector.
CCL is a specific energy tax on the supply of gas and electricity to non-domestic users in the United Kingdom. CCL applies at a rate of GBP0.00554 per kWh from 1 April 2015, increasing to GBP0.00559 per kWh from 1 April 2015.
Most electricity generated from a renewable source has been exempt from the CCL. Levy Exemption Certificates (LECs) are issued to generators of renewable source energy for each MWh of electricity produced. LECs transfer along with the electricity and can be used by electricity suppliers to support the CCL exemption and so, like ROCs, they have a value that a renewable generator can realize. This value is the CCL rate in place for electricity when the electricity is generated. HMRC require a number of conditions to be met for the exemption to apply and a LEC alone is not sufficient evidence to support exemption from CCL.
However, in July 2015, the Government announced that the exemption from CCL for renewable electricity generation would cease to be available in respect of electricity generated on or after 1 August 2015. It is possible to continue to redeem LECs in respect of electricity generated prior to 1 August 2015 under transitional arrangements that are currently subject to consultation.
The Carbon Price Floor (CPF) applies a levy on fossil fuels used to generate electricity and so represents a cost advantage to renewable generators, who will not be subject to the CPF. Published rates from 1 April 2015 are:
|Supplies of commodity liable to:||2015-16||2016-17|
|Carbon Price Support Rates of CCL|
|Natural gas (GBP per kilowatt hour)||0.00334
|LPG (GBP per kilogram)||0.05307
|Coal and other taxable solid fossil fuels
(GBP per gross gigajoule)
|CPS Rates of Fuel Duty|
|Gas oil; rebated bioblend; kerosene
(GBP per litre)
|Fuel oil; other heavy oil; rebated light oil
(GBP per litre)
Feed-in tariffs are available for small-scale, low-carbon electricity generated by private/business users (maximum capacity 5 MWh) providing payment of up to GBP0.1366 per kWh generated (depending on the type and size of the system used to generate renewable energy); plus a guaranteed GBP0.0485 per kWh sold on to the UK electricity grid. Typically the tariffs last for 20 years.
Two schemes operate to provide long term tariff support for renewable heat generation:
Renewable generators are exempted from the requirement to purchase carbon allowances in order to generate electricity, as stipulated by the EU Emissions Trading Scheme.
Tax relief is available on qualifying capital expenditure incurred through the capital allowances regime under one of the following categories:
Capital allowances are also available where a person makes a payment to a third party (i.e. network provider, National Grid), but does not necessarily own or operate the asset. This is dealt with under a separate part of the capital allowances regime, that is, Contribution Allowances.
As a way to incentivize investment in plant and machinery, HMRC introduced the Annual Investment Allowance (AIA) which provides a 100 percent first year allowance for a certain amount of qualifying capital expenditure. The AIA was set at GBP500,000 per annum for the period from 1 April 2014 to 31 December 2015. It will be reduced to GBP200,000 as of 1 January 2016.
Land remediation relief: Where a company incurs expenditure (capital or revenue) on remediating contaminates from sites or undertakes work on a derelict site, then an enhanced tax relief (Land Remediation Relief) of 150 percent can be claimed. If a company is loss making, the entity can benefit from a 16 percent cash tax credit of its surrenderable loss, subject to specific restrictions.
R&D incentives: These incentives enable companies to obtain additional benefits from their investments in R&D. An enhanced tax deduction of 230 percent is available for small and medium-sized enterprises (225 percent prior to 1 April 2015) for revenue expenditure on qualifying projects designed to achieve an advance through the resolution of scientific or technological uncertainty. Where expenditure is capital in nature, RDAs may be claimed (see above).
For loss making SMEs a tax credit of 14.5 percent can be claimed by surrendering “R&D losses.” Large companies may instead claim an R&D Expenditure Credit (RDEC) that gives a taxable payment of 11 percent capable of being accounted for in operating profit (10 percent prior to 1 April 2015).
The RDEC translates into an effective benefit of 8.8 percent after tax on qualifying revenue expenditure with the benefit available for profit and loss making companies. (Note: The old 130 percent super-deduction regime is also available to large companies until 31 March 2016).
Patent Box: The Patent Box regime enables companies to apply a lower rate of corporation tax of 10 percent to profits derived from patented inventions and certain other innovations, phased in over 5 years from 1 April 2013. The company must own or exclusively license-in the patents, and must undertake qualifying development on them to be eligible for the lower tax rate. (Other forms of IP protection may also qualify.) A new regime is being introduced from 1 July 2016 with the benefits available based on the proportion of the innovation undertaken by the claimant company. The exact details of the new regime have not yet been finalized but are expected to be announced in the 2015 Autumn Statement. It is expected that there will be a limited window in which to access benefits under the existing regime, and once in the existing regime, benefits will be grandfathered until 30 June 2021.