Authors: Alice Gunn, Product Developer & Helen Sanders, Wholesale Policy Manager
Energy intensive industries to be exempt from the cost of the Renewables Obligation from 1 April 2018; the compensation scheme for the Feed in Tariff remains in place until legislation is amended to introduce an exemption.
What has changed?
In December 2017, the UK Government published amendments to legislation which will allow energy intensive industries (EIIs) to be exempt from up to 85% of the indirect cost of the Renewables Obligation (RO). This exemption will be introduced from 1 April 2018. Until 1 April 2018 the existing compensation scheme for the RO will continue.
This is the second of three exemptions for energy intensive industries which we expect to come into force. The first, an exemption from the costs of the Contracts for Difference (CfD) scheme, came into force at the end of October. The third, an exemption from the cost of the Feed in Tariff (FIT) scheme, which does not have any fixed timescale for implementation. We’re currently waiting on more information from the government.
Why has this exemption been introduced?
The costs of the CfD, RO and FIT schemes 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. Learn more by downloading our Non-Commodity Costs guide here.
In the Chancellor’s Autumn Statement in 2015 , the Government announced its intention to switch from retrospectively compensating EIIs for the indirect costs of the RO and FIT schemes to exempting them. This would ensure that EIIs have up-front, long-term certainty and can remain competitive in an international market. 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.
Impact of the exemption on electricity bills
Eligible EIIs will see a reduction in their electricity bills, as we pass this exemption through. It is forecasted that the resulting impact on the CfD and RO price will be an increase of around 3%, as the cost is re-distributed across non-exempt customers. However, the intention by the UK Government to introduce the EII exemption was communicated in advance and therefore we could set forecasts accordingly.
Non-Commodity Costs, which are those associated with government schemes and levies as well as supporting the operation and balancing of the network, are making up an ever-increasing proportion of the total bill. We now see these costs making up 55% of the total electricity bill, compared to just 25% in 2010 . As well as this general increasing trend, we are also seeing more regular policy, regulatory and industry shocks making it harder to forecast future costs, many of which are not realised in advance.
Introducing SSE Protect
SSE Business Energy understands the concerns of customers in forecasting these price fluctuations into their energy strategy. SSE Protect is our latest fixed price contract to help provide budget for our business customers. If non-commodity costs increase during the life of the contract, it means the price our customers pay will not change. This is true whether the contract is for one or three years. Want to know about solutions for sustainable overhead cost management? Read Rob Silvester’s latest post.
How to claim the exemption
Customers eligible for the CfD exemption will automatically be eligible for the RO exemption scheme.
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). These customers will be exempted from 85% of the cost of the RO; this is the same level of compensation which EIIs currently receive for the RO and FIT.
An EII with a certificate demonstrating eligibility for the CfD exemption will automatically be eligible for the RO exemption. To receive a certificate, EIIs must register with the Department for Business, Energy and Industrial Strategy. Further information on eligibility requirements and on how to apply can be found here . Once you have a certificate, please notify your SSE Business Energy account manager who will action the exemption within 30 days.
If you want more information on the process, please contact our friendly energy experts on 0800 072 3317