Fourth Report Contents

Appendix 2: Draft Renewables Obligation (Amendment) (Energy Intensive Industries) Order 2017

Additional Information from the Department for Business, Energy and Industrial Strategy (BEIS)

Q1: Is BEIS seeking state aid clearance to extend the Renewables Obligation (RO) exemption to direct competitors to the Energy Intensive Industries (EIIs) that will benefit from the RO exemption?

A1: BEIS notified the European Commission of a proposal to provide State aid to direct competitors in December 2015 and officials have had a number of discussions with Commission officials regarding the notification. However, we currently do not have Commission approval for the approach set out in the proposal. We are therefore considering options that may be available to us within the scope of the 2014 environmental and energy State aid guidelines.

Q2: If so, when will this issue be resolved?

A2: Resolving the issue depends on appraisal of alternative options, which may lead to a revision of our State aid notification and further discussions with the European Commission to obtain State aid approval.

Q3: If not, what is BEIS’ view of the impact of the proposed RO exemption on the competitive position of non-eligible direct competitors to the EIIs?

A3: We recognise that the Government’s business level test may lead to intra-sectoral competitive distortions where one company qualifies for aid, but its direct competitor does not and we submitted a State aid notification to the Commission with a proposal to provide state aid to direct competitors in December 2015. As mentioned in the answer to question one, we are considering options within the scope of the 2014 environmental and energy State aid guidelines.

Q4: What representations has BEIS received from the latter?

A4: BEIS has received representations from, in particular, the trade associations and/or companies in the glass, ceramics and cement sectors. They call for a widening of eligibility to address competitive distortions within their respective sectors.

Q5: BEIS proposes to switch from a compensation scheme to an exemption. Why has BEIS decided on this change so soon after the compensation scheme was introduced? Was an exemption approach not considered in January 2016 and, if it was, why was it not implemented then?

A5: Budget 2014 announced that “The government intends to compensate energy intensive industries for higher electricity prices resulting from the Renewables Obligation and small scale Feed-in Tariffs’. The compensation schemes were then introduced in January 2016. The Autumn Statement 2015 announced that “The government will provide an exemption for Energy Intensive Industries, including the steel industry, from the policy costs of the Renewables Obligation and Feed-in Tariffs’.

The Government believes that the exemption scheme provides additional benefits to EIIs of increased certainty, compared with a compensation scheme, and real time support provided to EIIs by being exempt from the costs of the RO. An exemption is not contingent upon departmental budgets which can fluctuate. This increased certainty, in turn, can help maintain competitiveness of EIIs in two ways. Firstly, as EIIs will be supported in real time this frees up working capital which can be deployed elsewhere. Secondly, the EII may be able to raise or service debt at a lesser cost while maintaining their target debt service coverage ratios. This may have wider beneficial impacts on output, investment and employment decisions. Moreover, this may also reduce the risks of investment and carbon leakage.

27 July 2017

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