Alexander Mann takes a look at the changing rules around energy intensive industry compensation
It comes as no surprise that different businesses consume varying amounts of energy not just by size but by the nature of their business. For example, a small office-based business will use far less energy per head compared to a global manufacturing giant using heat-intensive industrial processes. In order to address a cost differential between the UK and other countries the government is introducing an exemption for these energy intensive industries (EIIs), which could mean higher costs for those not captured under this.
EIIs are distinguished by their industry sector and electricity intensity, with the government using strict qualifying criteria – for example a business must manufacture a product within the UK in one of the eligible sectors, and must pass the electricity intensity test. Eligible sectors include (but are not limited to) steel, chemicals, engineering, and brick; those in which energy usage makes up a significant part of the product cost.
While the UK is committed to cutting greenhouse gases and helping businesses reduce their carbon footprint, this creates a cost differential on energy prices compared to other countries, such as with the ‘Renewables Obligation’ (RO) charge.
For EIIs this would result in significant costs but over recent years the government has run a compensation scheme whereby EIIs can reap back 85 per cent of their RO costs, and their Feed-in Tariff (FIT) costs, in a bid to encourage them to remain part of the UK economy. However, in the 2015 Autumn Statement the government announced it intended to reduce the impact of renewables policies to the cost of electricity for EIIs. This proposal will see the compensation scheme replaced by an ‘exemption scheme’, and would see the 85 per cent reduction of costs automatically waived for businesses considered ‘eligible’.
While this may be good news for qualifying EIIs who will save a considerable amount of money, those considered not eligible are likely to incur higher costs. For these businesses, Cornwall has estimated that they’re likely to see an increase in both FIT and RO costs of up to six per cent annually, to cover the 20 TWh of electricity included in the EII exemption scheme.
It’s imperative to know in advance whether your business is likely to qualify for the exemption scheme. The government’s website includes a list of requirements that your business will have to meet to be classed as an EII with a compulsory form to be completed.
The introduction of an EII exemption scheme towards RO and FIT was due to commence in April 2017, however with State Aid approval from the European Commission not being granted in time has resulted in the date being pushed back. A revised date has not yet been provided by the Department of Business, Energy and Industry Strategy (BEIS). The two likely options are that it will be introduced part way through the current Obligation period; or it will be deferred until the start of the next Obligation period in April 2018.
Concerned EII businesses can speak with their energy provider to understand ways in which they could balance energy costs in other ways, for example planning energy consumption more closely, understanding how much energy the business uses and what for, buying energy in advance and at times when prices are lower, and becoming more energy efficient.
While the new EII rules will benefit some businesses at the expense of others, all businesses concerned should plan ahead to understand and forecast the implications, whether positive or negative.
Alexander Mann is Regulatory Advisor at Gazprom Energy. Gazprom Energy, the retail arm of London-based Gazprom Marketing & Trading Ltd, is an award-winning business energy supplier with a passion for customer service and the backing of one of the world’s largest energy companies. In the UK, it focuses on being a reliable supplier that offers value for money and excellent customer support.
For further information please visit: gazprom-energy.co.uk