Energy intensive industries exempt from the cost of Contracts for Difference

Energy intensive industries to be exempted from the cost of Contracts for Difference; the compensation schemes for the Renewables Obligation and Feed in Tariff remain in place until legislation is amended to introduce exemptions.

What has changed?

At the end of October, the UK Government brought into force an exemption from the cost of the Contracts for Difference (CfD) scheme for energy intensive industries (EIIs). This policy was first introduced in the 2011 Autumn Statement, when the Chancellor announced his intention to exempt certain EIIs from a proportion of the indirect costs of the scheme, and has been the subject of several government consultations since.

The CfD exemption is the first of three exemptions for EIIs which we expect to come into force in the next couple of years. The other exemptions will replace the compensation schemes which are in place for the Renewables Obligation (RO) and the Feed in Tariff (FiT) scheme. This change will mean that EII customers receive a rebate on their energy bill for the cost of these schemes, rather than receiving compensation at a later date. Legislation for the RO exemption is currently passing through Parliament and we expect this to be introduced in 2018. We are awaiting the Government’s response to the consultation on the FiT exemption, which should give us a clearer idea of the timescales for its introduction. In the meantime, the existing compensation schemes for the RO and FiTs will remain in place.

Why has this exemption been introduced?

The costs of the CfD, RO and FiT are covered by electricity suppliers, based on the size of their market share. These policy costs make up part of the non-commodity costs included in our customers’ electricity bills. The Government has decided to introduce these exemptions to provide certainty and ensure that EIIs operating in an international market are not placed at a significant competitive disadvantage due to renewable energy support costs. These industries are often large employers and form a vital part of the UK economy. They include sectors such as steel, chemicals, engineering and brick making, where electricity usage accounts for a significant proportion of production costs.

How to claim the exemption?

Eligible customers are those which manufacture a product in the UK within certain sectors, and those whose electricity costs amount to 20% or more of their gross added value (also referred to as the 20% electricity intensity test). The Government has also published a list of defined EIIs on its website. These customers could be exempted for up to 85% of the cost of the CfD; this is the same level of compensation which EIIs currently receive for the RO and FIT.

To benefit from the compensation and future exemption scheme EIIs must be registered with the Department for Business, Energy and Industrial Strategy and receive a certificate proving eligibility. The same certificate will prove eligibility for the RO exemption when this is introduced. Customers must then pass their certificate onto their energy supplier. The exemption will come into effect when both parties are in receipt of the certificate and the supplier has put the relevant arrangements in place to implement the exemption; suppliers have 30 days to do this.

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