The government has made some exemptions for energy-intensive industries from contributing to carbon reduction schemes, so they do not adversely affect these businesses which would impact the UK economy.
What is the Exemption for Energy-Intensive Industries?
An exemption for energy-intensive industries has been created to reduce the charges imposed on them from carbon reduction initiatives as they would be disproportionately impacted due to their heavy electricity usage. Companies impacted by this exemption include steel and chemical companies.
The potential overall saving collectively is estimated at being approximately £100 million per year in electricity charges. These exemption costs are associated with a government scheme called Contracts for Difference which is aimed at encouraging investment into low-carbon electricity generation technologies.
The costs from the Contracts for Difference scheme are recovered through a levy that is placed on energy suppliers. These costs are then passed on to their customers through their energy bills, this includes both domestic and business customers. For most customers, this levy only forms a minor part of their electricity bill but for energy-intensive industries, it has a more substantial impact.
The exemptions have gained the approval of the European Commission as being acceptable exemptions that can be classed as State aid. The exemptions were also set out in legally binding documents which form regulations that are approved by Parliament.
Who Does This Exemption Apply to?
It is estimated that potentially over 130 energy intensive industries could benefit from this exemption in the UK. This exemption could apply to industries such as steel, chemicals, glass, and cement.
To be eligible for the exemption the business must operate in one of the predefined sectors, and its electricity costs must account for a minimum of 20% of their Gross Value Added. For further information about eligibility and how to apply for the exemption see the government guidance.
Why Have the Government Introduced This Exemption?
The government has exempted the energy-intensive industries from these low-carbon energy generation scheme costs because they have committed to help UK industries and these levies that would form part of their energy bill would make a substantial difference to these businesses’ operational costs.
This is a commitment that the government made as part of its Industrial Strategy. From this strategy, the government flags up that they need to balance their carbon reduction commitments with keeping the costs down for businesses to maintain the UK’s attractiveness and competitiveness for such industries, and these energy-intensive industries are those that have the greatest risk of losing their competitiveness in the international market.
The industries that can benefit from this exemption bring a value of £52 billion to the UK economy as well as supporting 600,000 jobs according to the Energy Minister, Jesse Norman. These industries are often located in areas that suffer from higher rates of unemployment too.
The difference that the Contract for Difference levy has on the energy-intensive industries is significant as the levy charge would account for only 3% of the electricity bill for most businesses whereas energy-intensive industries could it be as high as 10%.
What is the Contracts for Difference Scheme?
Contracts for Difference is a government-led scheme to assist the adoption of low-carbon electricity generation.
Periodically, Contracts for Difference auctions are held where low-carbon electricity generators can bid for a contract to set up new generation capacity in the UK. The bid includes the price that is needed to make the new generation capacity viable this is called a strike price, and this is an agreed price as part of the contract.
The difference between the electricity wholesale price and the strike price is paid for as part of the Contracts for Difference scheme, so the generator gets the guaranteed strike price for every kW of electricity generated. This strike price is set for a fixed number of years and the length varies depending on the technology.
By guaranteeing the strike price for the electricity generated it give generators and their investors’ certainty and support that is often needed to get the new generation projects off the ground as the energy wholesale market is so uncertain.
To learn more about the scheme, how it works, and why it is necessary, visit our guide.
Are There Any Other Exemptions for Energy-Intensive Industries?
The government is also investigating further exemptions for energy-intensive industries that are needed as a result of carbon reduction policies that adversely affect energy costs. These are currently being explored with the European Union to ensure that they comply with State aid rules.
There are currently compensation schemes in place to aid the energy-intensive industries with the costs associated with the Renewable Obligation and the Feed-in Tariff which may be replaced by exemptions in future.