Energy News, November 2018

Energy News, November 2018

It’s fair to say that most manufacturers are concerned about their escalating energy costs. Industrial business in the UK pays a lot for the energy they use. Aside from labour, energy can be the largest overhead for many manufacturing businesses, and as a result, efficient at using it. Efficiency, however, can be hard to sustain in in ever-changing regulatory and political landscape.

 

Which makes understanding the government’s recently released energy documents a key priority for all businesses – but particularly those operating within energy-intensive sectors such as chemical, food, basic metals (iron, aluminium, iron), rubber and plastics, and paper- most of which, incidentally, the UK is something of a world-leader in.

 

How will commodity costs be affected by the changes in the Budget?

 

Recently, we’ve seen rising gas and electricity prices, and it looks as though prices will remain high for the foreseeable future. Part of the reason for high prices is the cost of carbon. The Carbon Price Support (CPS) has been frozen for 2020-21, so it will stay at £18/teC02. However, we’ve seen the other main carbon tax for generators – the European Emissions Trading Scheme (EU ETS) – increase significantly in the past year.

 

The Budget confirmed that in the event that the UK leaves the EU ETS when we leave the EU, the government will introduce a new Carbon Emissions Tax to ensure we meet our carbon reduction commitments under the Climate Change Act. This tax will initially be set at £16/teC02, which is similar to current EU ETS price for carbon. This means that the UK’s power generators will continue to pay both the CPS and the EU ETS or carbon emissions Tax, and these costs will be passed on to business customers.

 

For those manufacturers who are part of a Climate Change Agreement, securing them exemptions from much of the CCL, it will be more important than ever to meet carbon reduction targets to avoid penalties, or even being removed from the CCA scheme and forced to pay the run UCL.

 

Is there better news when it comes to non-commodity costs?

 

Many businesses will have noticed that non-commodity costs have been on a steady incline for some time, but so far, we’ve only seen gradual changes to the Climate Change Levy (CCL). However, this will increase significantly next April as ‘lost revenues’ caused by the closure of the Carbon Reduction Commitment will be replaced by large increases in CCL, particularly for gas. The Budget has also confirmed earlier policy announcements that CCL rates on gas will be increased at a far greater rate for the next few years and is expected to achieve parity with CCL on electricity by the mid-2020s.

 

CCL on gas is currently around a third of the rate for electricity. However, in 2019, the gas rate will rise to around 40% of the CCL tax compared with electricity. By 2021-22, this will be increased to 60% of the value of electricity. Fortunately, the rebalancing exercise is intended to be revenue-neutral to the Treasury, so while the CCL on gas will increase, the levy on electricity will fall.

 

The Budget has confirmed that the government will continue to invest in green business incentives, but there will be a few changes in how they do so. From April 2020, they will be scrapping the Enhanced Capital Allowance (ECA) scheme, which allows businesses to set 100% of the costs of certain energy and water efficiency technology against taxable profits. However, the government has pledged to introduce a new Industrial Energy Transformation Fund, to which they have committed £315m in funding. This fund will support energy-intensive companies to become more energy efficient and reduce their carbon emissions.

 

The ECA scheme will be extended, however, for companies that invest in electric vehicle (EV) charge points up until 31 March 2023. There will also be a slight change to vehicle duty, which will now be based on the Worldwide Harmonised Light Vehicle Test Procedure (WLTP).

 

This means that the fuel economy of vehicles will be determined by ‘real world’ tests, which is likely to reduce the tax benefits of hybrid vehicles and instead favour fully electric vehicles. The government will also issue a call for evidence on a new energy efficiency scheme for SMEs, and they are considering a new tax on waste incineration to encourage recycling.

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