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Introduced in April 2001, the Climate Change Levy was applied to all energy used by Business and Industrial consumers for Heating, Lighting and Power.
Put simply, the levy was applied to electricity, gas, petroleum products, coal and coke.
Partial exemption of up to 80% was granted to certain classes of high-energy users and uses including:
Foundries
Primary Aluminium Smelting
Non-ferrous metal and Steel Production
Paper, Ceramic, Cement and Chemical Industries
Horticultural Producers
Full exemption was granted to:
Domestic users
Schools and certain Education Establishments
Communal Residential Accomodation
Health Care Premises
Exemption was also granted to energy supplied from new renewable sources or produced from good quality CHP schemes.
An additional benefit introduced to assist low energy, highly staffed businesses was a reduction of 0.3% in Employers National Insurance Contributions.
Climate Change Levy was set at the following rates for each energy source (excluding petroleum products ):
Electricity 0.43p/kWh
Natural Gas 0.15p/kWh
L.P.G. 0.96p/kilogram ( equivalent to 0.07p/kWh )
Coal and Coke 1.17p/kilogram ( equivalent to 0.15p/kWh )
The purpose of the levy is to encourage the efficient use of energy, not to raise tax. Consequently the government has put in place a range of measures to assist energy users to improve their energy efficiency. The measures are as follows:
- Action Energy
. Advice and a wide range of best practice publications can be obtained via the Environment and Energy Helpline, email: help@actionenergy.org.uk, telephone 0800 585 794.
- An energy efficiency fund.
This will build on the Best Practice Programme and provide energy efficiency advice and audits to businesses. It will also work to stimulate research, development and take up of renewable sources of energy and other low carbon technologies via the Carbon Trust. This will enable business to be involved in decisions on how best to use the energy efficiency fund. The Carbon Trust also has a role in updating the list of technologies eligible for enhanced capital allowances (see below).
A system of 100% first year capital allowances for energy saving investments by the private sector. Firms making qualifying investments will be able to deduct the full costs of those investments in arriving at their Corporation Tax or Income Tax bills.
Renewables Obligation Certificate ( ROC )
The Renewables Obligation, which is an artificial market administered by the government’s Office of the Gas and Electricity Markets (Ofgem).
All "Suppliers" selling electricity to "Customers" must now by law source a certain proportion of their total sales from accredited "renewable" electricity generating sources, such as biomass, wind-power, tidal energy, land-fill gas, or a number of other generation technologies. If they fail to do this, they pay a fine.
In 2002/2003 the law required that 3% of supplied electricity was "renewable". In 2003/2004 the proportion was 4.3%, and it will gradually rise, until in 2010/2011 it will reach 10.4%.
A supplier of electricity proves to Ofgem that they have met this obligation by producing "Renewable Obligation Certificates" at the end of the year.
If a supplier fails to meet its obligation it must pay a so-called "buy-out" fine for every MWh it sold that was not "renewable".
All companies generating power from accredited renewable sources are issued with Renewable Obligation Certificates by Ofgem. One MWh of electricity entitles the generator to one ROC.
When the renewable generator sells electricity to the supplier it is common, though not necessary, to sell the ROC too.
Because the ROC can save the supplier from having to pay a fine it adds to the price of the electricity.
The ROC is also worth something extra because it entitles the supplier to a share of the "buy-out" fines at the end of the year.
Thus, we can see that a renewable energy power station has two sources of income:
1. the price of the electricity they generate,
2. the price charged for the ROCs which they sell on to suppliers.
A Renewable Energy Station’s Income
We are now in a position to see how much a renewable electricity generator might earn in a normal year. In the following calculations we will use £20 per MWh as an approximate wholesale electricity price, and the latest average ROC price of £47.18.
Let us imagine a 16 turbine wind farm somewhere in England. Each turbine is of 2 MW. We can calculate the total likely output:
32 MW (total capacity) x 8760 (hours in a year) x 0.241 (Load factor) = 67,557 MWh.
Thus we can calculate the likely income from the RO system:
Electricity income: 67,557 MWh x £20 per MWh = £1,351,140
Renewable Obligation Income: 67,557 MWh x £47.18 per ROC = 3,187,339
Total Income: £4,538,479
Thus, we can see that electricity sales constitute 30% of a renewable station’s income. The remaining 70% comes from indirect subsidy.
Each supplier can produce a fuel mix certificate. This shows the percentage of energy supplied to you that is generated from renewable, gas, coal and nuclear sources.
Load Factor, or "capacity factor", is the proportion of theoretical maximum output that a power station can produce under normal working conditions. The output of conventional power stations is limited by the need for regular servicing, and by mechanical failure. Wind turbines are additionally limited by the fact that there may be no wind. Or, if there is wind it may not blow hard enough to generate maximum output at any particular time, or it may blow so hard that the turbines have to be shut down to prevent damage. Last year the UK’s wind turbines achieved a Load Factor of 24.1% (Dti, Digest of United Kingdom Energy Statistics 2004).
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