By Dipa Tank – Risk Management Specialist, Consultus International Group
Background
For almost a decade, the UK government has provided more than £2billion of financial support to businesses in energy intensive sectors through the introduction of various schemes to boost the share of electricity generated from renewable and low-carbon sources to meet its legally binding pledge of zero carbon emissions by 2050. The EII Compensation and Exemption schemes are intended to help energy-intensive industries stay competitive against their international counterparts as the economy transitions to zero carbon.
On 14th June 2021, the Department for Business, Energy & Industrial Strategy (BEIS) launched a consultation as part of a wider review to assess the risk of carbon leakage due to the indirect emission cost from the UK Emissions Trading Scheme (ETS) and carbon price support (CPS), seeking views from sectors most at risk of carbon leakage whilst assessing whether there continued to be a rationale for continued compensation.
EII Compensation scheme set to continue with additional funding support
Since the introduction of the UK ETS last year, the carbon price has risen substantially by as much as 60% and is expected to reach far higher levels than originally projected. Consequently, the indirect carbon emissions costs have increased significantly and placed many EII’s under the threat of heightened carbon leakage. Energy intensive industries (EIIs) are particularly exposed to carbon leakage due to their high proportional energy costs and high exposure to trade. The risk of carbon leakage through indirect emission costs of the UK ETS and CPS are likely to increase if the carbon price continues to rise.
Scheme Details
On 29 April 2022, BEIS announced details of their plans for EII’s to receive further support toward electricity costs for a further 3 years to 31 March 2025, alongside a budget double that of its first iteration, with government recognising that UK industrial electricity prices are higher than those of other countries. Payments under the scheme will be backdated to 1 April 2022, with the scheme now also offering support for companies that manufacture batteries for electric vehicles.
What could this mean for EII’s?
- For the first time, battery manufacturers will be eligible under the compensation scheme to help keep the UK at the forefront of this growing industry. However, the schemes do not extend to all EII’s that are at risk of carbon leakage.
- The increase in compensation, by capping the total indirect emission cost at 1.5% of a company’s Gross Value Added (GVA) in a respective year or 75% subsidy intensity, whichever is greater, will enable eligible UK EII’s to compete on a more even playing field across borders. Essentially, increasing the percentage of indirect emission costs which Government is compensating for when compared with the current scheme.
- To ensure that the compensation schemes are aligned with the wider decarbonisation goals of the Government, all recipients of compensation must submit a plan by the end of the first year of the scheme (March 2023) setting out their decarbonisation pathway.
- The Energy Intensive Users Group (EIUG) has called on Government to publish its analysis underpinning eligibility, provide a justification for increasing the eligibility thresholds set out in the consultation and, if necessary, to extend eligibility.
- The EIUG is looking to work with Government to introduce further measures to reduce industrial electricity and gas prices, such as increasing the renewable obligation exemption to 100%. This however would mean non eligible EII’s would face further increases in pass through non commodity costs.
- The UK Government is considering additional stricter conditions and data monitoring requirements alongside a proposal which requires businesses to show all compensation received and spent within their company accounts for implementation at a future date post 2023.
How can businesses assess their eligibility for the EII scheme?
To qualify for the EII Compensation and/or Exemption schemes certain EII businesses should meet the below criteria:
- The compensation schemes apply to Great-Britain only and energy intensive industries in Northern Ireland are not eligible.
- Business must be in an energy- intensive sector and participate in an activity included in the government response (Sectors eligible for compensation page 6 & Page 32 Annexe A). This is known as passing the “sector level.”
- A business must pass what the government calls a “business level test”, where a business proves that their electricity costs amount to 20 percent or more of their Gross Value Added (GVA) over a reference period.
- For FY 22/23 firms’ level of compensation is determined initially using a 5- year reference period of historic data, where annual accounts are available.
- Due to the impact of Covid-19, companies in eligible sectors will be allowed to exclude pandemic years 2020/21 and 2021/22 for the reference period. In these cases, companies will have a three-year reference period.
- After the first year of the scheme, compensation may be calculated based on the actual level of production or electricity consumption of the preceding quarter.
- Prove the company is not in any financial difficulties.
- Applications for Compensation under the UK Emissions Trading Scheme and Carbon Price Support can be made Here.
Eligible businesses can also claim up to 85 percent Exemption of their Contract for Differences (CfD), Renewables Obligation (RO), and Feed-in Tariff (FiT) costs.
How else can Consultus help?
Even if you, as a big energy user, do not qualify for the EII compensation scheme, there are other means of guidance, assistance, and support to help you mitigate the risks associated with volatility in energy costs. Our energy management consultancy services guide businesses through other schemes and policies such as Energy Risk Management, Procurement, Net Zero Carbon, Energy efficiency audits, Streamlined Energy and Carbon Reporting (SECR), and Energy Savings Opportunity Scheme (ESOS). These provide invaluable insight into your energy consumption patterns and environmental impact. They unveil ways for your business(es) to enhance energy management to drive budget certainty and efficiencies within your operations.