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Eleventh Standing Committee on
Thursday 20 March 2003
[Mr. Bill Olner in the Chair]
Draft Climate Change Levy (Combined Heat and Power Stations) Prescribed Conditions and Efficiency Percentages (Amendment) Regulations 2003
The Economic Secretary to the Treasury (John Healey): I beg to move,
That the Committee has considered the draft Climate Change Levy (Combined Heat and Power Stations) Prescribed Conditions and Efficiency Percentages (Amendment) Regulations 2003.
Having served under your chairmanship, Mr. Olner, I look forward to you overseeing our proceedings.
The regulations are narrow and technical in effect. They form part of a package of legislative amendments designed to deliver the Chancellor's Budget 2002 commitment to extend exemption from the climate change levy to electricity produced by good-quality combined heat and power stations, and to onward sales made by licensed electricity suppliers. The extension of the exemption will help to bolster the CHP industry and encourage growth in that efficient form of electricity generation.
The package of measures is designed to encourage greater use of CHP, which typically achieves a 25 to 30 per cent. reduction in energy use compared with more traditional forms of electricity and heat generation. Generating electricity in CHP stations produces fewer carbon emissions than conventional generation—about 0.97 million tonnes less carbon per gigawatt in the year 2000.
The new exemption enables qualifying CHP-generated electricity to be supplied free of the climate change levy, regardless of the particular supply route to the end consumer. Currently, such electricity enjoys relief only on direct supply from a CHP operator to a customer. The levy treatment of those direct supplies is unchanged, but CHP operators will be able to supply climate levy-relieved electricity to a licensed supply company, which can then make an onward supply free of levy. The relief for indirect supplies will help to make CHP-generated electricity more attractive.
The package of legislation required to introduce the change consists of three elements. First, an appointed day order, which was made on 11 March, brings into effect section 123(1) of the Finance Act 2002. That section contains the necessary primary law changes to allow Customs to exempt qualifying electricity. Secondly, Customs and Excise commissioners regulations, also made and laid on 11 March, will come into force, subject to the negative resolution procedure, on 1 April. These contain the bulk of the technical detail and insert provisions on certification, record keeping, reconciliation and other formalities
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necessary to give effect to the exemption. That will effectively create a system equivalent to that which applies to renewable electricity. Thirdly, the draft regulations before us make two small, but important, technical changes to the Climate Change Levy (Combined Heat and Power Stations) Prescribed Conditions and Efficiency Percentages Regulations 2001, governing the treatment of CHP electricity. They partly exempt CHP stations, which comprise about 10 per cent. of generators.
Mr. Michael Clapham (Barnsley, West and Penistone): Before my hon. Friend starts to examine the specifics, will he tell us about the industry's response to any consultation? Has he assessed the impact on the CHP industry?
John Healey: I am grateful for my hon. Friend's question. He follows energy industry matters closely.
Since the Chancellor made the announcement in the Budget last year, there have been full discussions with the industry, which has seen the regulations as we have prepared them and welcomes them. The industry also put some points to us fairly late in the day about the potential impact on small CHP generators, and we have said that we will look further at whether we can simplify the system to help them, but the industry was content and it wanted the exemption to be introduced at the first opportunity. That is what we shall do this morning, with the Committee's permission.
CHP stations are eligible for the current, and the new, exemption if they are certified under the CHP quality assurance programme, which is operated by the CHP quality assurance administrators on behalf of the Department for Environment, Food and Rural Affairs. The CHP quality assurance programme administrators assess the efficiency and environmental performance of each CHP station, and those factors govern the extent to which electricity generated by the station qualifies for relief.
Depending on the environmental benefit, all or some output qualifies for the exemption under the climate change levy. The qualifying proportion of electricity is certified as qualifying power output, known in the industry jargon as QPO. Stations already need to be assessed and certified to qualify for relief on the input fuel, so there will be no additional burden on CHP stations or operators.
Mr. Mark Prisk (Hertford and Stortford): Will the Minister clarify whether there is to be an additional administrative burden from the changes in the quality assurance programme that he outlined?
John Healey: No, we do not expect that to be the case, because the principal purpose is to assess the environmental performance and efficiency of the power station, which is undertaken now and which will continue under the quality assurance programme. The process will remain as it is, and we do not expect there to be additional administrative burdens as a result of the provisions.
As a result of the proposed changes, levy exemption certificates will be issued by the regulator, Ofgem, to CHP operators up to the value of the qualifying power output to denote that the electricity should remain
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exempt throughout the supply chain. Where the QPO is less than 100 per cent. of the total power output of the CHP, the station is known as ''partly exempt'', and that is the relevance of these regulations. Supplies from such stations are exempt up to, and only up to, the certified QPO limit. To help CHP operators to claim maximum benefit from the exemption, the basis for calculating QPO is being changed from an absolute to a proportional limit as part of the Customs and Excise commissioners regulations. That means that a CHP operator will be able to maximise the benefit of the new relief.
To ensure that the provisions work effectively, it is necessary to remove regulation 5(3)(a) of the existing regulations, which means that domestic and charity non-business supplies can no longer be disregarded for the purposes of calculating the qualifying power output. I emphasise to Members that that is an administrative arrangement, and it will be the first technical change made by the regulations that we are considering. I stress that that has no impact on the levy treatment of domestic and non-business charity consumers of energy, who will continue to be exempt.
The second effect of the draft regulations will be to remove, by omitting regulations 5(3)(b) and 5(4) of the 2001 regulations, a provision that is adequately replicated in the CHP quality assurance programme. That tidying-up measure does not change the treatment of mechanical power output. All electrical power, even when used as an integral part of the electricity generating process, will continue to be included in the calculation of the QPO. Similarly, where a CHP operator uses mechanical power to drive pumps, fans or compressors, an electrical equivalent will be calculated and counted towards the QPO.
Members will appreciate that the measures will grant the CHP sector a competitive advantage over conventional electricity generation. The exemption required state aid approval from the European Commission. I am pleased to say that the Commission approved the exemption on 5 March, so I can ask the Committee to approve this legislation, which will help to give the exemption effect.
With the Committee's approval, I intend to introduce the exemption from 1 April. The overall cost of the CHP exemption will not exceed £15 million a year until 2005. We calculate that, thereafter, the revenue foregone will depend on the levy rates and the policy's success in encouraging further CHP electricity generation. We estimate that, at current levy rates, the cost could rise to £25 million a year by 2010.
I have given a full explanation of the regulations to anticipate the points that may arise. I hope that the Committee supports the changes, because they will further help us to deliver on the environmental objectives of the climate change levy.
Mr. Prisk: I look forward to your chairmanship of the Committee, Mr. Olner, and I am sure that you will keep us in order. I thank the Minister for his full explanation of the regulations. This is quite an early hour at which to grasp all the details and acronyms,
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but all members of the Committee will be keen to do so.
The regulations are the latest adjustment to the climate change levy since its introduction in April 2001. It is fair to say that the view from business since then has been that the levy is burdensome and that, in its current form, its effect on the environment is at best questionable. Indeed, the Confederation of British Industry and the Engineering Employers Federation conducted a survey that showed that the levy had added £328 million to the annual manufacturing energy bills in each financial year. Even after the reduction in the national insurance rate, which the Budget included, the net burden to manufacturing remains over £143 million a year.
The levy has, in many senses, been a burden, and the problem has been compounded by the fact that businesses that are capital intensive but low in labour have a large levy but little gain from the national insurance reduction. All that comes when manufacturing continues to be in recession and business investment has diminished. Indeed, since 1997, manufacturers have shed over 600,000 employees.
Before considering the detail of the regulations, therefore, I point out that a number of organisations, including the EEF, have made serious representations on the efficacy of the levy. I hope that the Minister and the Chancellor of the Exchequer give their Budget submissions due consideration. There is a strong case not merely for the tinkering that we have seen so far, but for radical reform of how the levy is implemented.
The purpose of the regulations, as I understand it from what the Minister said, is to lift the limits on levy exemptions for combined heat and power-generated electricity where that power is supplied through a third party. All Members welcome CHP-generated electricity, and it is on the increase—[Interruption.]