• Service: Tax
  • Type: Regulatory update
  • Date: 9/24/2014

United Kingdom 

Taxes and Incentives
United Kingdom Taxes and incentives for renewable energy KPMG Global Energy & Natural Resources.

Support schemes

Investments and other subsidies

Exemptions are in effect from the Climate Change Levy and Emissions Trading Scheme.

Operating subsidies

Renewable obligation scheme

Long-term banded quota mechanism designed to support renewable electricity generation.

Feed-in tariff (small scale generation)

Tariff support payments for small-scale electricity generation from a variety of technologies.

Renewable heat incentive

Long term tariff support payments for renewable heat generation.

Additional information

Electricity market reform

The Energy Act 2013 brought in major reforms to the UK electricity market. The key market mechanisms relevant to this publication are Feed-in Tariffs with Contracts for Difference (CfDs) to give revenue certainty to investors in low-carbon generation and the Carbon Price Floor which imposes a fossil fuel tax.

The CfD for each low carbon generation technology is available from 2014/15 and is scheduled to replace the Renewable Obligation Scheme by 2017. For most renewable technologies, the CfD is expected to last for at least 15 years and take effect from 2014/15 onwards.

The table below sets out the CfD strike prices for renewable technologies for 2014/15 to 2018/19 (with each year beginning on 1 April). Support will be paid based on net renewable electricity generated.

Renewable Obligation (RO) scheme

This requires electricity suppliers to source a specific percentage of electricity from renewable sources. Renewable generators receive Renewables Obligation Certificates (ROCs) for each MWh of electricity generated, and these ROCs can be sold independently of the electricity generated, allowing renewable generators to receive a premium to the wholesale electricity price. Where an electricity supplier has an insufficient number of ROCs to meet an obligation, it must pay an equivalent amount of 43.30 United Kingdom Pound (GBP) per MWh (2014/2015 rate) into a buy-out fund. This fund is used to cover the administration cost of the scheme and the rest is distributed back to suppliers in proportion to the number of ROCs they produced. There is a banded ROC mechanism whereby different renewable electricity technologies receive different levels of support according to their technological maturity and levelled costs (see table below).

A table summarising the banding levels for the banding review period (2013-17) in England and Wales:

The government has confirmed that applications for the RO regime can be made until 2017, thereby extending the scheme until 2037. From 2027 the Department of Energy & Climate Change (DECC) will fix the price of the ROC for the remaining 10 years of the RO at its long-term value, and buy the ROCs directly from the generators to reduce volatility in the final years of the scheme. Renewable generators may not receive a CfD and also participate in the RO regime.

Climate Change Levy (CCL), renewables exemption

CCL is a specific energy tax on the supply of gas and electricity to non-domestic users in the United Kingdom.

Most electricity generated from a renewable source is exempt from the CCL. Levy Exemption Certificates (LECs) are issued to generators of renewable source energy for each MWh of electricity produced. LECs transfer along with the electricity and can be used by electricity suppliers to support the CCL exemption and so, like ROCs, they have a value which a renewable generator can realize. HMRC require a number of conditions to be met for the exemption to apply and a LEC alone is not sufficient evidence to support exemption from CCL.

Carbon Price Floor

The Carbon Price Floor (CPF) applies a levy on certain types of fossil fuels used to generate electricity and so represents a cost advantage to renewable generators, who will not be subject to the CPF. Published rates from 1 April 2014 are:

Feed-in tariffs (small scale generation)

Feed-in tariffs are available for small-scale, low-carbon electricity generated by private/business users (maximum capacity 5 MW) providing payment of up to GBP0.2223 /kWh generated (depending on the type and size of the system used to generate renewable energy); plus a guaranteed GBP0.0464 /kWh sold on to the UK electricity grid. Typically the tariffs last for 20 years.

Renewable Heat Incentive ("RHI")

Two schemes operate to provide long term tariff support for renewable heat generation:

  • Domestic RHI, which is available for domestic properties where households receive payments of between GBP0.073 and GBP0.192/kWh depending on the technology generating the renewable heat. Any public grants previously received, including the Renewable Heat Premium Payment (RHPP), will be deducted to avoid a double subsidy. Non-domestic RHI, which provides a subsidy, payable for 20 years, to eligible, non-domestic renewable heat generators and producers of biomethane. The tariff payments are dependent on the technology of the heat generation source and the size of the plant, with payments ranging from between GBP0.010/kWh and GBP0.094/kWh for the period commencing 1 April 2014.

EU Emissions Trading Scheme exemption

Renewable generators are exempted from the requirement to purchase carbon allowances in order to generate electricity, as stipulated by the EU Emissions Trading Scheme.

Other direct tax allowances / incentives potentially relevant to renewables generators

  • The rate of capital allowances is 18 percent reducing balance for capital expenditures on plant and machinery allocated to the main pool. This is reduced to 8 percent if the asset’s useful expected economic life exceeds 25 years
  • Most businesses can claim the Annual Investment Allowance (“AIA”) on the majority of plant and machinery except cars. From 2013 the AIA is being increased to GBP500,000 in relation to expenditure incurred on or after 1 April 2014. From 1 January 2016 the AIA will reduce to GBP25,000.
  • Enhanced Capital Allowances (“ECAs”) give a 100 percent First Year Allowance for expenditure incurred on specified energy-saving plant and machinery. A 19 percent cash tax credit of its surrenderable loss is available for loss-making companies up to a maximum of GBP250,000 or the company’s PAYE and NIC liabilities, whichever is less. However, ECAs are explicitly not available in respect of expenditure on plant or machinery which generates electricity or heat or produces biogas or biofuel, that attracts a FiT (small scale generation) or RHI payment.
  • Land remediation relief provides a deduction of 100 percent, plus an additional deduction of 50 percent, for qualifying expenditure incurred by companies in cleaning up land acquired from a third party in a contaminated state. A 16 percent cash tax credit of the qualifying land remediation surrenderable loss can be claimed for loss-making businesses.
  • The Patent Box enables companies to apply a lower rate of corporation tax of 10 percent to profits derived from patented inventions and certain other innovations, phased in over 5 years from 1 April 2013. The company must own or exclusively license-in the patents, and must undertake qualifying development on them to be eligible for the lower tax rate. Research and Development (R&D) tax relief enables an enhanced tax deduction of 130 percent for large companies and 225 percent for SMEs from 1 April 2012 for revenue expenditure on qualifying projects seeking to achieve an advance through the resolution of scientific or technological uncertainty. From 1 April 2013, large companies may instead claim an ‘above the line’ tax credit which gives a taxable payment of 10 percent (effective benefit of 7.9 percent after tax in 2014/15) on qualifying revenue expenditure. If the R&D expenditure is capital in nature, a 100 percent allowance can be claimed on the R&D capital expenditure in that year.

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