Carbon Price Support Campaign

The CHPA has been actively involved in a campaign to ensure that CHP receives fair treatment under the new Carbon Price Support tax due to be introduced in 2013. The campaign has involved extensive financial modelling of the proposals, engagement with government departments and working with wider stakeholders most impacted by the proposals. The briefing below sets out the key issues in the consultation and the CHPA’s consultation response contains a fuller analysis of the impact on CHP and how this could be addressed.

The Government has committed to support the carbon price with the aim of increasing certainty for investors in low carbon electricity generation. This support will be provided through reform of the Climate Change Levy (CCL).

This reform undermines the existing exemptions from the CCL that are the key support for combined heat and power (CHP) plant. These exemptions provide a sustaining level of subsidy that facilitates the continued operation of CHP plants and some limited growth in installed CHP capacity. The UK, however, missed its 2010 target for 10 GWe CHP by 4.4 GWe.

Preserving exemptions for CHP would maintain or even enhance the competitive position of CHP and improve prospects for securing the 12.7 GW of CHP plant the Government needs to meet its 2020 carbon savings targets.

The value of CHP
CHP is among the best available carbon abatement options for energy intensive users and is a highly cost effective solution for community and commercial scale energy schemes. For energy consumers it reduces energy consumption and helps to mitigate rising energy costs. Manufacturing industry has invested in CHP to help maintain competitiveness and manage costs, and today accounts for over 80% of UK CHP capacity.

CHP operating in the UK today saves between 9 and 13.5 MtCO2 per annum
The Government is projecting an increase in CHP capacity to 12.7 GWe by 2020. This expansion will contribute an estimated 10 MTCO2 to wards the Government’s 3rd carbon budget.

Impact of the Government’s proposals
The Government’s proposals introduce a new carbon price support (CPS) CCL liability for power generators, based upon the fossil fuel consumed for power generation. A CHP plant, which consumes fuel for the production of both power and heat, will similarly face a CPS liability on the total fuel consumed. This approach takes no account of the additional costs facing a CHP plant or of the efficiency and carbon-saving benefits it delivers. As a consequence it presents a punitive and disproportionate impact on such plant:

• manufacturing industries which have invested in CHP to manage their energy costs and reduce carbon emissions will be hardest hit – and in many cases will be proportionately worse off than if they had pursued the higher-carbon, default approach of importing grid electricity.
• localised and community-based energy projects will face further cost-based barriers to entry, and will be deterred from operating and developing schemes that deliver market diversity and cost-savings to consumers.
• prospects for developing major industrial CHP on refining, LNG or chemicals, papermaking and food processing sites will be curtailed owing to the exposure to greater risk to revenues.
• the Government will lose carbon savings, by CHP schemes being decommissioned or simply declaring themselves to be no longer CHP so as to qualify for a more generous tax treatment. N.B. This could include up to 13.5 Mtonnes of existing CO2 savings, which the Government would need to find from somewhere else – presumably at the more expensive end of the carbon abatement curve.

A simple solution
To ensure that CHP operations and investment are not harmed by the reform of the CCL, there are two possible options:

1. In recognition of the value of CHP and the need to increase uptake in line with the Government’s climate change and energy security agenda, CHP should be fully exempted from the CPS tax. This would provide additional material benefit and accelerate progress towards realising the full national potential for CHP
2. As a minimum, the input fuel used to generate heat in CHP should be exempted from the CPS tax. This would retain the status quo for operators and investors.

It is vital the any exemption is simple and does not create administrative burdens for Government. The CHPQA programme is used to verify that CHP plant save fuel and emissions.

A very simple no-cost modification to CHPQA procedures could be made to calculate either a full or limited exemption from the CPS tax for CHP plants.

The illustrative investment appraisal below, demonstrates that under the Government’s proposals, a large CHP plant operating on an oil refinery offers weaker returns than the ‘do nothing’ option of operating a boiler and buying grid electricity. Exemption from the CPS tax moves a CHP plant from a position of disadvantage to one where the incentive to invest is enhanced.

Please contact:
Tim Rotheray T. 020 7802 0181
Policy Manager M. 07540 982 014
Combined Heat & Power Association E. tim.rotheray@chpa.co.uk