Eligibility for an exemption for the costs of Contracts for Difference for Energy Intensive Industries

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1 Eligibility for an exemption for the costs of Contracts for Difference for Energy Intensive Industries Summary of BIS consultation July 2013 RWE npower 7/25/2013 PAGE 1

2 BACKGROUND RWE npower 7/25/2013 PAGE 2

3 What is the consultation about? Electricity Market Reform is about fundamentally changing the UK s generation mix to meet climate change commitments and securing sufficient supply to meet future energy needs and will come at a cost. Currently the cost of carbon tax is higher in the UK than in a number of other countries, which is impacting the ability to remain competitive for those companies that are energy intensive and trade internationally. One of the major cost elements is Contracts for Difference (CfD), which is a mechanism designed to encourage investment in low carbon generation, however this will have a further cost impact on organisations. The consultation puts forward four options* for CfD exemption eligibility along with the anticipated costs for each option, for those organisations that don t qualify for exemption. BIS is inviting feedback on these options during a consultation period that ends 30th August At npower we would like to offer organisations the opportunity to feed back directly to us in order that we can collate responses and submit a report to BIS this mirrors similar activity that we have undertaken in promoting the voice of businesses for EMR, Feed in Tariffs, Carbon Reduction Commitment, the government s energy Red Tape Challenge and Energy Intensives compensation package for EU ETS and Carbon Price Floor. Please follow the link at the end of this pack to complete a short survey, the results of which will be shared with BIS. *1a, 1b, 2a, 2b described in slides 10 & 11 RWE npower 7/25/2013 PAGE 3

4 Electricity Market Reform (EMR) has 4 pillars Carbon Price Support Tax to ensure generators pay a minimum price for their carbon emissions. Carbon Floor Price to 2020 IMPLEMENTED FROM 04/13 WITHIN WHOLESALE PRICE Emission Performance Standard (EPS) Clearly defined set of emission levels to prevent investment in carbon intensive power stations (i.e. coal without Carbon Capture and Storage (CCS)). EPS = 450g CO 2 / kwh - only applicable to new plant ENERGY BILL Low Carbon Generation Feed In Tariffs/ Contracts for Difference (CfD) Low carbon generators are guaranteed a fixed price for power generated, but have to pay back if the market price goes above the fixed price. Operation of Contracts for Difference Capacity Mechanism Market wide mechanism designed to ensure adequate, reliable power generation capacity is in place to meet peak demand. Peak De-rated Capacity Margin Expected to appear as line items on business bills, similar to FiT RWE npower 7/25/2013 PAGE 4

5 Contracts for difference > Low carbon generators will receive a Contract for Difference Feed in Tariff (CfD) which provides them with a fixed price for their electricity output. Monies received from selling generation output onto the wholesale market. Top up payment to the agreed CfD strike price (the difference between the pre-defined reference price and strike price). > If the reference price rises above the strike price, then generators will have to pay back the difference. > Suppliers will have to fund the difference between the reference price and the strike price via a Supplier Obligation. > Funds will be raised from suppliers via a compulsory levy. > A government owned counterparty body will sit between the generator and the supplier, managing the flows of money. > CfD costs will form part of the government s Levy Control Framework which is set at 7.6bn2 in > As of July 2013, we estimate the customer impact of Contracts for Difference to be 5-10/MWh by 2020 more accurate cost impacts are expected in Autumn > Energy Intensive Industries will be exempt from CfD payments (subject to State Aid clearance and consultation). Illustrative CfD costs Electricity Price /MWh Generator topped-up to strike price -40 Time Market Revenue /MWh FiT CfD payment /MWh Monthly Electricity Price CfD payment model Strike Price Generator pays back RWE npower 7/25/2013 PAGE 5

6 International comparison of energy costs Indicative incremental impacts in 2011, 2015 and 2020 on electricity price ( /MWh, 2010 prices) of energy and climate change policies > It is clear from the chart that the UK already pays considerably more energy tax than other countries. > These figures do not include the anticipated additional costs of EMR. > This puts cost pressure on those UK businesses that trade on an international basis. Summary of compensation / exemption schemes in other European nations (double click and expand to open): Member State Sweden & Norway Denmark Germany Renewable EII exemption State Remarks Support Aid Mechanism Renewable Electricity used No Eligible EIIs need to register at the Swedish Energy Agency and submit annual Quota in manufacturing electricity consumption data. In 2011, about 450 companies were registered as Obligation processes by electricity-intensive, exempting a total of 40,3 41,3 MWh from a quota with penalty electricityintensivfigures1/publications/ obligation. price companies is exempted from the quota obligation, though other electricity used in the company is quota liable. Public Danish Yes The tariff is collected by the grid company and transferred to Energinet.dk who Service consumers pays out the feed in tariffs. The tariff is fixed by Energinet.dk for each three Obligation using more than months to cover actual expenses. 100 GWh pa only contribute Danish electricity supply act 8 to 9a. 9: to RE support for those first 100 GWh Feed-in The Federal No The exemption is tapered. Companies are eligible for the exemption if their Tariff Office for electricity consumption is at least 1GWh and if their electro-intensity is 14%. Economy and Companies with electricity consumption between 1-10GWh pay 10% of the Export Control EEG-levy. Companies with electricity consumption between GWh pay limits the EEGlevy on request 100GWh pay 0,05c/kWh. 1% of the EEG-levy and companies with an electricity consumption over for a consumption point of an energy intensive industry, supplied by an electricity RWE npower 7/25/2013 PAGE 6

7 Existing compensation for energy intensives > In 2012, BIS consulted on compensation for the cost of EU ETS and Carbon Price Support and in May 2013 State Aid approval was granted for EU ETS compensation. > Customers belonging to the SIC codes shown are eligible for compensation for EU ETS providing they can demonstrate that their carbon costs will exceed 5% gross value added (EBITDA plus staff costs) in > State Aid approval for Carbon Price Support is expected towards the end of SIC Code Description Aluminium production Mining of chemical and fertilizer minerals Manufacture of other inorganic basic chemicals Lead, zinc and tin production Manufacture of leather clothes Manufacture of basic iron and steel and of ferro-alloys Manufacture of paper and paperboard Manufacture of fertilizers and nitrogen compounds Copper production Manufacture of other organic basic chemicals Preparation and spinning of cotton-type fibres Manufacture of man-made fibres Mining of iron ores The following sub-sectors within manufactureof plastics in primary forms Low-density polyethylene Linear low-density polyethylene High-density polyethylene Polyethylene Polyvinyl chloride Polycarbonate The following sub-sectors within manufacture of pulp Mechanical pulp RWE npower 7/25/2013 PAGE 7

8 THE CONSULTATION RWE npower 7/25/2013 PAGE 8

9 Principles / considerations from BIS An exemption should be targeted at companies whose competitiveness is at risk from rising electricity policy costs i.e. we should exempt only those companies that are both electricity intensive and trade intensive. Eligibility should be designed to minimise distortions within the UK economy. The exemption should avoid perverse incentives, e.g. discouraging take up of energy efficiency initiatives. The exemption should minimise administrative burden for all parties Energy Intensives (EIIs), electricity suppliers and Government. The exemption should minimise the costs to consumers outside of the scope of the exemption (both business and household) whilst meeting the policy objective. RWE npower 7/25/2013 PAGE 9

10 The four options under consultation OPTION 1A Compensation mirror OPTION 1B Reduced exemption level > Anticipated redistributive cost for ineligible organisations: 40 60p/MWh > Government s preferred option. > Provides 80% exemption from CfDs for eligible businesses. > Targets businesses at risk of carbon leakage (i.e. moving out of the UK). > Businesses must either belong to a defined list of SIC codes defined by the EU as vulnerable OR be able to demonstrate that they trade significantly on an international basis and are therefore at risk where UK electricity prices increase. > In addition, organisations must demonstrate that the indirect additional costs of carbon in the UK would lead to an increase in production costs amounting to at least 5% of gross value added (GVA) in 2020 (defined as EBITDA + staff costs). > The criteria above mirror those set out for EU ETS and Carbon Price Floor compensation. > Examples of eligible sectors include manufacturers of: iron, steel and ferro-alloys, certain organic and inorganic chemicals and pulp, paper and paperboard. > Anticipated redistributive cost for ineligible organisations: 30 50p/MWh > Uses the same eligibility criteria as option 1a. > Exemption level is reduced to 67% as opposed to 80% in option 1a. > This reduces the redistributed costs to other UK consumers. RWE npower 7/25/2013 PAGE 10

11 The four options under consultation OPTION 2A Eligibility wider than ETS/CPS OPTION 2B Compensation plus a taper for additional sectors > Anticipated redistributive cost for ineligible organisations: 80p/MWh > This extends the organisations eligible for existing compensation schemes to include wider parameters than those set out in option 1a, so wider than existing EU ETS and Carbon Price Support compensation eligibility. > Instead, organisations would have to demonstrate that the combined cost of Carbon Price Support, EU ETS and Contracts for Difference (CfDs) amount to more than 5% GVA in > This approach is expected to include medium electricityintensive organisations, providing tax relief to some businesses that are not eligible for ETS and CPS compensation. > Anticipated redistributive cost for ineligible organisations: 70p/MWh > Same eligibility criteria as option 2a, so combined costs are taken into consideration. > The amount of exemption would vary though between the eligibility core (80% exemption for those already eligible for existing ETS & CPF compensation) and the periphery (other organisations that qualify under the combined option described in 2a would receive for instance a 50% exemption). RWE npower 7/25/2013 PAGE 11

12 Consultation questions Question 1: Do you agree with the principles for evaluating exemption eligibility options? (slide 9) Question 2: Taking account of all of the principles, do you agree with the preferred option, 1a? Question 3: What percentage of costs would an exemption need to be set at to deal with the competitiveness issues raised by EMR CfDs? Question 4: Are there advantages or disadvantages of any of these options that have not been included within BIS consultation document? (attached) Link to consultation document Question 5: Do you have a preferred option? What factors lead you to prefer that option? Question 6: Do you anticipate that the redistributive impact of any of the options will cause your household or your business difficulties? Please provide details when responding. RWE npower 7/25/2013 PAGE 12

13 Next steps The npower EMR pulse survey can be accessed via the below link and it will be available until Friday 9 th August. Contact at BIS responsible for this consultation is: Max Mawby Tel: RWE npower 7/25/2013 PAGE 13

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