Chancellor George Osborne chose his first budget yesterday to raid renewable energy generators income, removing the ‘Climate Change Levy exemption’ they have enjoyed since 2001.

At a stroke the renewable industry just lost an important revenue stream typically accounting for 5-10% of their income, expected to add up to £3.9 billion over the lifetime of this parliament.

Greenpeace policy director Doug Parr said removing the climate change levy exemption on renewables was “taxing clean power as if it were a fossil fuel.”

RenewableUK’s Director of Policy, Dr Gordon Edge, described the abrupt termination of the scheme as “a punitive measure for the clean energy sector” thsat would cost renewable energy producers “vital financial support”.

“The Chancellor says the removal of the exemption will earn the Treasury £450 million in 2015/16, rising to £910 million in 2020/21”, he said. However that gain to the Treasury was loss to renewable power generators:

“We’re suddenly looking at a substantial amount of lost income for clean energy companies which was totally unexpected. For example, Levy Exemption Certificates account for just over 6% of onshore wind generators’ revenues.

“The Government had already announced an end to future financial support for onshore wind – even though it’s the most cost-effective form of clean energy we have. Now they’re imposing retrospective cuts on projects already up and running across the entire clean energy sector.”

Drax shares down 28%

One of the early losers is Drax, the power generator, which uses large volumes of biomass – mainly in the form of imported wood chips and pellets – in addition to coal. Shares in the company slumped around 25% yesterday in response to the budget.

As reported on The Ecologist Drax’s use of biomass is highly controversial owing to the impact on native forests in source countries. Last year renewable energy subsidies are estimated to have earned the company £340 million.

Dorothy Thompson, the company’s chief executive said she was “disappointed” by the government’s decision. Industry analysts have estimated that the end of the levy could reduce Drax’s revenues by £30m this year and double that in 2016.

But according to the budget statement, “This change will correct an imbalance in the tax system by preventing taxpayers’ money benefitting renewable electricity generated overseas, and by helping ensure support for low carbon generation provides better value for money for UK taxpayers.”

What is not clear, however, is why the Government could not simply make overseas renewable power generator ineligible for the benefit, rather than abolish the scheme altogether.

Paul Flynn MP attempted to table a question to the Chancellor, George Osborne, for answer on Monday, enquiring “what assessment he has made of the potential effect on UK (a) energy security and (b) plans to reduce greenhouse gas emissions of his policy to remove the climate change levy exemption for renewable electricity?” However the question was blocked and he will receive no reply.

How it works, sorry, worked

Introduced in 2001, the CCL is an tax on energy delivered to business and other non-domestic UK energy users, and its purpose is to incentivise a switch to lower carbon forms of energy, and increase energy efficiency.

The CCL is raised at varying levels on fuels based on the carbon they embody, including electricity based on an averagfe carbon weighting. Energy users can exempt themselves from paying the tax by buying ‘Levy Exemption Certificates‘ that the energy regulator Ofgem issues to renewables generators.

But now the Treasury has announced the end of the scheme, it will be phased out over a ‘transition period’ that starts on 1st August and will continue over the summer.

According to an HMRC briefing note: “The government is committed to meeting its climate change objectives in a cost effective way. Without action the exemption would cost £3.9bn over this Parliament and one third of this value would go to supporting renewable electricity generated overseas …

“Removing the exemption will stabilise CCL revenues, contributing to fiscal consolidation. It will maintain the price signal necessary to incentivise energy efficiency. It will also bring a significant simplification to CCL. “

More austerity for renewables on the way

The immediate effect will be to reduce revenues to established renewable power generators, and to give the backers of ‘pipeline projects’ – conceived but not yet built – pause for thought as revenues will be smaller than planned for. The same applies to future projects receiving fixed price payments for power under feed-in tariffs (FITs). Inevitably a number of projects will not go forward.

With new schemes seeking finance under the ‘contracts for difference’ (CFD) system that will be use to finance many future projects, the move will force renewable generators to enter higher bids at CFD auctions. This will shift the cost of renewable energy away from the Treasury and into the ‘Levy Control Framework’ (LCF) financed by a supplement on all UK energy users bills, which is technically not a tax.

However tight cash limits on the LCF mean that higher CFD prices can only translate into a further reduction of new renewable power projects.

With the end of the CCL exemption coming on top of more bad news such as the exclusion of wind projects from the Renewables Obligation, it is increasingly clear that the UK will fail to meet its EU renewable energy target, that 15% of all its energy use should be renewable by 2020.

Dr Edge was surely speaking for many when he said: “Yet again the Government is moving the goalposts, pushing some marginal projects from profit into loss. It’s another example of this Government’s unfair, illogical and obsessive attacks on renewables.”

Oliver Tickell edits The Ecologist.