Clause 205 - Climate change levy

Finance Bill – in a Public Bill Committee at 1:15 pm on 21st June 2012.

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Question proposed, That the clause stand part of the Bill.

Photo of Sir David Amess Sir David Amess Conservative, Southend West 1:30 pm, 21st June 2012

With this it will be convenient to discuss the following:

That schedule 29 be the Twenty-ninth schedule to the Bill.

That schedule 30 be the Thirtieth schedule to the Bill.

Amendment 197, in schedule 31, page 605, line 2, after ‘April’, leave out ‘2013’ and insert ‘2017’.

Amendment 198, in schedule 31, page 605, line 4, after ‘April’, leave out ‘2013’ and insert ‘2017’.

Amendment 199, in schedule 31, page 605, line 4, at end add—

‘(4) The Chancellor of the Exchequer shall conduct a review of the expected impact on carbon emissions, security of supply and industrial competitiveness of the removal, in 2017, from combined heat and power plants of the Climate Change Levy exemption for indirect supplies of electricity and shall, by 31 December 2012, lay a report of his review in the House of Commons Library.’.

That schedule 31 be the Thirty-first schedule to the Bill.

Photo of Seema Malhotra Seema Malhotra Labour, Feltham and Heston

Mr Amess, it is a pleasure to serve under your sunny chairmanship today—that is a theme continued from this morning as the weather has got better. I beg to move amendments 197 to 199.

Photo of Sir David Amess Sir David Amess Conservative, Southend West

Order. I advise the hon. Lady that she can speak to the amendments but not move them now.

Photo of Seema Malhotra Seema Malhotra Labour, Feltham and Heston

Thank you, Mr Amess. I am speaking to amendments 197 to 199 to schedule 31—clause 205—relating to the removal of the climate change levy exemption, which is due to take effect in April 2013.

Part 3 of the schedule provides for the ending of the exemption from the climate change levy for electricity produced in either a fully-exempt or a partly-exempt combined heat and power station that is supplied by an electricity utility to an energy consumer. As a result of the schedule, any electricity acquired by an electricity utility from a generator after that date will not be eligible for the exemption.

Combined heat and power generation is a process whereby the heat that is invariably produced during electricity production is captured and reused. CHP helps to avoid significant energy losses and to reduce CO2 emissions. As heat is not wasted in cooling towers, CHP is a much more efficient process than generating heat and electricity separately. As a result, CHP units, which use renewable fuels such as wood burning biomass, solar and wind, can be up to 95% efficient. By using less fuel, CHP also reduces imports of gas, helping security of supply. CHP typically reduces energy use by 30% compared to separate heat and electricity generation.

CHP is recognised as one of the key technologies to offer a realistic alternative to centrally generated electricity. It is estimated that CHP accounts for 7% of UK electricity generation capacity, that it saves 13 million tonnes of CO2 annually and that industrial sites using CHP support 130,000 jobs. CHP capacity is predominantly located in industry, chemicals, paper, refining and food manufacture. The highly efficient nature of CHP supports the competitiveness of British industry by reducing energy costs. CHP users include a range of organisations, such as universities, local authorities and businesses.

I think that it would be helpful to cover a small amount of the history of the levy exemption. In 2003, the Labour Government recognised the value of CHP by providing an exemption from the climate change levy on electricity sold to the grid. That support was known as the CHP levy exemption certificate. In effect, it was tax relief for each unit of electricity generated.  Hon. Members will be aware that the climate change levy is a tax on the taxable supply of specified energy products for use as fuels—for lighting, heating and power—by business consumers in industry, commerce, agriculture, public administration and other services. The wider significance beyond a tax-revenue-generating measure is the incentive for changed behaviour and reduced carbon output—a crucial part of greening our economy and incentivising the change that we need to see, and something on which there is general cross-party agreement.

The CHP levy exemption certificate is a very low-cost support mechanism, costing £5 per megawatt-hour of electricity, whereas renewable electricity support starts at about £45 per megawatt-hour. The CHP levy exemption certificate system is designed to ensure that a CHP plant exports electricity to the national grid. By exporting its electricity, CHP plants are helping to change the way in which we produce electricity by displacing less efficient gas or coal power stations and reducing CO2 emissions from the power sector, as well as on the site on which such units are installed.

In 2009,the previous Government extended the CHP levy exemption certificates until 2023. In 2012, the Chancellor of the Exchequer confirmed his intention to remove the CHP levy exemption certificates 10 years early, ending in April 2013.

Our amendment calls on the Chancellor to amend his proposals to bring forward the ending of the CHP exemption certificates to 2013 by extending that end date from April 2013 to April 2017. In addition, it says:

The Chancellor of the Exchequer shall conduct a review of the expected impact on carbon emissions, security of supply and industrial competitiveness of the removal, in 2017, from combined heat and power plants of the Climate Change Levy exemption for indirect supplies of electricity and shall, by 31 December 2012, lay a report of his review in the House of Commons Library.”

We need to ensure that the effects of this change on industry are reduced and made more manageable. CHP requires significant capital investment, and business plans will be based on more than one or two years of forecasts of usage and return on investment. Working with industry on any changes is an important factor in helping to ensure that a phased change can occur over a manageable business investment cycle, and that any recent investments during these difficult economic times are not seriously adversely affected.

Will the Minister provide the Committee with an update on the following areas of inquiry? What estimate does he make of the costs of owning and operating a CHP plant if the support is removed? What emissions savings will be made by CHP plants if the support is removed? If the UK energy use is less efficient and more gas and coal are needed to meet energy demands, what estimate does he make of the cost of fuel imports?

The Combined Heat and Power Association has made its own assessment with input from its members. It says that extending the levy to 2017, rather than ending it in 2013, will have the benefit of providing the Government with time to develop a replacement support mechanism within the electricity market reform programme.

The Treasury’s impact assessment of the effect of the removal of the CHP levy exemption certificates did not include an assessment of how the costs would impact on industry, on carbon emissions or on security of energy supply. Given that industry had been guaranteed  support until 2023, such an assessment of the early termination of support would be of value, as would a welcome message of partnership working between Government and industry, which would have national implications.

I know that the Chancellor has stated that the CHP LEC was not an ideal system for supporting CHP, and some may agree with him. However, let me summarise our concerns that the removal of this support 10 years early, with one or two years’ notice and without clarity on what will replace it runs the risk of creating confusion in the marketplace, a slowdown in the momentum of the development of such new technologies and of carbon reduction and could undermine investor confidence in general. One of the most important enablers of business investment is the predictability of the tax regime, and the avoidance of sudden cliff-edge changes. Finally, I would be grateful if the Minister also updated hon. Members on the consultation that has been undertaken with the industry.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I thank my hon. Friend the Member for Feltham and Heston for laying out so clearly and succinctly the concerns of the industry. I look forward to hearing what the Minister has to say. I may return to one or two of those points.

As we are aware, clause 205 and schedules 29 to 31 amend the climate change levy provisions. In particular, schedule 29 deals with the climate change levy in three parts. Part 1 retrospectively amends schedule 6 to the Finance Act 2000 to provide that the amount of CCL payable on a supply that has been treated as a reduced rate supply, but that it is later determined should not have been, is 65% with effect from April 2011.

Part 2 amends schedule 6 by replacing the suspended exemption from the CCL for taxable commodities used in metal recycling processes with a 20% lower rate from April 2012. Part 3 amends the rates of levy set out in schedule 6, including the reduced rate on supplies of electricity and the lower rate for Northern Ireland gas supplies, with effect from April next year.

Schedule 30 deals with climate change agreements and amends schedule 6 to make changes to the administration of the climate change agreement scheme from 1 April next year. Participants in the scheme are entitled to a discount from the CCL in return for meeting energy efficiency or emission reduction targets. Schedule 31 deals with a number of issues relating to the carbon price support rates and combined heat and power stations.

As my hon. Friend the Member for Feltham and Heston has already indicated, some concerns have been outlined by the industry in relation to combined heat and power. As she has said, it is important to understand what combined heat and power does in terms of the generation both of electricity and usable heat in a single process. CHP is believed to be a more efficient process than generating heat and electricity separately. As she has said, by using less fuel, CHP reduces imports of gas, potentially helps security of supply and, it has been estimated, can also assist in reducing energy use by 30% compared with separate heat and electricity generation.

CHP accounts for some 7% of UK electricity generation capacity and saves 13 million tonnes of CO2 annually. CHP capacity is predominantly located in industry,  particularly affecting the chemicals, paper, refining and food manufacturing sectors. Although, of course, we are also seeing opportunities for the development of micro-CHP, which is not something I want to focus on today because I want to make some further points in relation to industrial settings.

As my hon. Friend has outlined, back in 2003, the then Government recognised the value of CHP by providing an exemption from the climate change levy on electricity sold to the grid. Electricity used on site was already exempted and, as she correctly identified, that was known as the CHP levy exemption certificate. In 2009, as has been said, the then Chancellor extended the CHP levy exemption certificates until 2023. At that time, the industry believed that that was going to be the position and therefore was planning accordingly—looking at investment and at how it would take things forward. Of course, as we have heard, in 2012 the current Chancellor confirmed his intention to remove CHP levy exemption certificates 10 years early as of next year.

The arguments that have come from the industry are that the CHP levy exemption certificate is a very low-cost support mechanism, estimated to be around £5 per megawatt-hour of electricity, whereas it is estimated that renewable electricity support starts at about £45 per megawatt-hour. Therefore, it believes there is an argument for the CHP levy exemption certificate system to continue. As my hon. Friend has outlined, her amendments suggest that the Government should consider doing that for a mid-point. I hesitate to say third way or mid-way because I would not want people to think that I was going soft in my old age. I think she makes the powerful point that consideration should be given to, or we should at least look again at, the impact on industry.

Photo of Iain McKenzie Iain McKenzie Labour, Inverclyde 1:45 pm, 21st June 2012

It is a pleasure, Mr Amess, to serve under your chairmanship. My hon. Friend is making a powerful point on behalf of industry; I know that very well. In my constituency, BPI Polythene has applied this method, and only yesterday it told me that it had enabled it to not only underline its green credentials—I am sure my hon. Friend will agree on that—but subsidise the production and efficiency of its plant. Indeed, it is thinking about rolling it out to other plants throughout the country.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I thank my hon. Friend for that information. Those are typical of the sorts of arguments that are coming forward from industry. I know that from work that I did before I came to this place, when I was a Member of the Scottish Parliament. Part of the constituency that I represented contained a number of industrial sites that wanted to use CHP and had found the measures the Labour Government had put in place extremely helpful.

Industry is telling us that if support is removed, it should be replaced with another system. That is the important point. People are not saying that things should never change, or should not be taken away, but they want an equivalent system and some certainty. They say that without support, the industry will become less competitive because the cost of owning and operating CHP plants will rise; emissions savings from CHP will fall as CHP stops, displacing some of the less efficient  plants; and fuel imports will increase, because energy use will be less efficient and more gas and coal will have to be brought in to meet the same energy demand.

I understand that the Government’s view is that the CHP levy exemption certificate was not an ideal scheme for supporting CHP, so it would be helpful if the Minister put on the record what he believes is the way forward, and gave the update that my hon. Friend the Member for Feltham and Heston asked for on the discussions and consultations that have taken place with the industry. It would also be helpful if the Minister said when we might see an alternative scheme. If the present scheme is not to be taken forward, an alternative scheme should be put in place to deal with the very real concerns that the industry has outlined.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 205 introduces important changes to the UK’s climate change and energy policy framework through the climate change levy, climate change agreements, and the carbon price floor. Taken together, those changes strike a sensible balance between helping business and meeting our environmental objectives. I shall begin by setting out what the clause and the schedules do.

Schedule 29 makes changes to the climate change levy. First, it retrospectively amends the Finance Act 2000 to include a consequential amendment that was omitted from the 2010 legislation, which changed the reduced rate of the climate change levy from 20% to 35%. This ensures that businesses that have paid the reduced rate of the CCL on more energy than was used will not have to repay more levy than was intended. We are not aware of any relief claimants that have been adversely affected by this omission. Nevertheless, it is still important to correct the error.

Secondly, the schedule introduces a lower rate of the CCL for supplies of taxable commodities for use in steel and aluminium recycling processes from 1 April 2012. Thirdly, it increases the rate of the climate change levy in line with the retail prices index from 1 April 2013, as is usual practice. The lower rate for gas supplies that will apply in Northern Ireland until 31 October 2013 will also be increased in line with the retail prices index.

Fourthly and finally, the schedule amends the reduced rate of the CCL on supplies of electricity for energy-intensive businesses with climate change agreements. From April 2013, the rate will be brought down from 35% to 10%. This relief will help around 4,500 businesses across the 54 participating sectors.

Schedule 30 will simplify the administration of the climate change agreement scheme from 1 April 2013 by providing for a new administrator of the new scheme. That will provide long-term certainty and reduce the regulatory burden on industry. The measure will also enable the consolidation of a number of statutory instruments. The schedule will also allow the administrator to impose penalties for minor failure through a light-touch scheme.

Schedule 31 will amend the legislation for the carbon price floor introduced in last year’s Bill and add new provisions. It will set the 2014-15 carbon price support rates, which are equivalent to £9.55 per tonne of carbon dioxide. The rates will provide certainty for investors by ensuring that the carbon price is in line with the Budget  2011 trajectory. The carbon price support rates of fuel duty for both years have also been announced and will be legislated for by statutory instrument in spring 2013.

We are also amending the basis on which the carbon price support rate for coal will be applied, so that levy due will be calculated by reference to the calorific value of the coal—its heat content—rather than its weight, in order to reflect commercial reality.

A further change will exempt the input fuels used to generate all good-quality non-electricity outputs in combined heat and power plants, subject to state aid rules. HMRC is discussing with the CHP industry exactly how the relief will operate. The Treasury will propose regulations next spring, exposing them in draft around the time of the autumn statement. The introduction of the relief will ensure that CHP generation is on at least a level playing field with non-CHP heat generation, which is not subject to the carbon price floor. As non-CHP heat generation is liable to the climate change levy on input fuels while CHP is not, CHP plants overall will continue to be publicly subsidised.

We are also making changes to exclude small-scale electricity generation of 2 MW capacity and less from the carbon price support rates. That will mean that many smaller CHP stations will be exempt, and it will greatly simplify the administration of the price floor.

Schedule 31 will also remove the exemption from the climate change levy for electricity generated by CHP plants and exported to the national grid. The relief was expensive to the taxpayer and not well targeted. However, if the electricity was generated in an eligible CHP station before 1 April 2013, electricity utilities will be able to exempt the supply to a business consumer up to and including 31 March 2018. My hon. Friend the Minister of State at the Department of Energy and Climate Change is looking at alternative options for supporting the technology.

The changes are being introduced in response to representations from business and in the interests of fairness and minimising business burdens. The introduction of a threshold of 2 MW generating capacity will exclude many CHP generators from the scope of carbon price support rates, meaning that they will not be required to register or pay the tax. The remaining CHP plants will benefit, in some cases significantly, from the exemption for input fuels used for heat.

Amendments 197 and 198, tabled by the hon. Member for Feltham and Heston, seek to extend Government support for combined heat and power plants for a further four years. Operators would continue to receive CHP levy exemption certificates for the electricity they generate through to 1 April 2017, rather than 1 April 2013. Also, sticking with a recurring theme, amendment 199 would require a report on the expected impact of the removal of the exemption.

The Government are committed to creating an environment that supports manufacturing within the UK, while meeting our environmental objectives. Schedule 31 will remove the exemption from the climate change levy for electricity generated by CHP plants and exported to the national grid. Extending the exemption to 2017, as the hon. Lady suggests, would not provide value for money for the taxpayer, nor would it provide optimal support for the technologies. The relief was expensive to the taxpayer and administratively complex.  In the current fiscal climate, it is not possible to justify the extension of the subsidy, which many people recognised was not perfectly targeted. However, if electricity was generated in an eligible CHP station before 1 April 2013, electricity utilities can exempt the supply to a business consumer up to and including 31 March 2018, which gives them five years to use up any stockpile of levy exemption certificates they hold.

The Government have considered the impacts set out in amendment 199. The exemption is not the most efficient way of meeting our environmental objectives while allowing our industries to remain competitive. We are introducing alternative ways of supporting CHP generation, as set out in schedule 31. We are exempting the input fuels used to generate non-electricity outputs from high-efficiency CHP, which, in practice, is mainly heat. Originally, we proposed a flat rate of relief for all CHP fossil fuel input, but industry asked for input fuels to be exempt when they produce heat, so, subject to state aid rules, that is what we will do.

HMRC will discuss with the CHP industry exactly how the relief will operate. We will continue to work with it to develop its longer-term strategy for heat, in line with wider fiscal and economic policy. The amendments are unnecessary and would result in a significant cost to the taxpayer, and although I appreciate that they have given the Committee an opportunity to debate CHP further, I ask the hon. Member for Feltham and Heston not to press them to a vote.

To conclude, the Government continue to make progress on the climate change and environment agenda with a range of policies. The measures under discussion strike a fair balance, supporting low carbon investment while allowing UK industry to remain competitive. I therefore hope that the clause and schedules stand part of the Bill.

Photo of Seema Malhotra Seema Malhotra Labour, Feltham and Heston

I thank the Minister for his comments and hon. Members for their speeches and interventions. I am slightly disappointed that we have not addressed more quickly the alternative ways of supporting CHP technology, but it is useful to hear confirmation that there are ongoing discussions with the Department of Energy and Climate Change to consider alternative options to support the technology. We look forward to hearing more on that in the near future. It is also useful to hear that discussions are ongoing with industry on a strategy for the future. I therefore beg to ask leave to withdraw the amendment.

Question put and agreed to.

Clause 205 accordingly ordered to stand part of the Bill.

Schedules 29 to 31 agreed to.

Ordered, That further consideration be now adjourned.— (Greg Hands.)

Adjourned till Tuesday 26 June at half-past Ten o’clock.