As we approach the crucial Paris climate talks - and at a time when the European Commission has placed the UK on its small list of countries which on current policies looks set to miss their binding 2020 renewable energy targets - David Cameron’s “greenest government ever” paradoxically continues to go about the task of unraveling many of our renewable energy subsidies.
And it looks like the government’s latest tinkering will see it back in court, this time to face a judicial review challenge for its handling of the removal of the climate change levy (CCL) exemption for renewable source electricity.
In case you need reminding, the CCL is a tax on business and public sector for their energy usage, introduced way back in 2001, with the principal aim of driving down energy consumption. As a supplement on energy bills, the CCL is effectively a tax collected by energy suppliers.
But the CCL was accompanied by an exemption for renewable source electricity (RSE), which incentivized carbon emission reductions by encouraging non-domestic energy users to sign up to green supply deals. By buying green energy from renewable generating plant (and the associated Levy Exemption Certificates (LECs)) in sufficient quantities to support those deals, suppliers were able to knock the CCL off the energy bill.
All that changed with George Osborne’s Summer Budget this year, which announced the abandonment of the RSE exemption from 1 August 2015.
For business and the public sector, this means the so-called Climate Change Levy is now a tax on energy supplies regardless of whether sourced from renewables or fossil fuels. It’s still an incentive to reduce consumption, granted, but no longer a means to encourage the deployment of renewables.
For the developers themselves, this is a big blow. Trade association RenewableUK has estimated that the changes could mean loss of revenue of around £450m in the current financial year, rising by up to £1bn by 2020-21.
But what has really rankled is the timing.
First, the change moved the goalposts for existing plant – a retrospective change which at a stroke has removed a valuable revenue stream whereby developers could sell LECs to suppliers at a discount against the CCL rate under their power purchase agreement as part of their offtake arrangements. For plant operators and suppliers, the terms of these power purchase agreements will now be key, specifically the manner in which change in law provisions apply to changes to the CCL regime so as to preserve value for the operator.
What’s more, the announcement was made on 8 July with the change coming into effect on 1 August 2015. That’s less than a month’s notice; effectively no notice at all (although there are transitional arrangements which allow suppliers to utilise LECs after 1 August if associated with electricity generated before then).
The key rationale given by government was the fact that the RSE applied to green electricity imported from continental Europe through the interconnectors with France and the Netherlands, and that this effectively meant UK taxpayers were subsidising low carbon generation overseas. True enough, except that by far and away the lion’s share of the LECs were issued to UK renewable generating plant.
Given all of this, perhaps a judicial review of the decision was always on the cards, and so no surprise when last week two of the biggest casualties – Drax Power and Infinis – announced they were going to court to challenge the decision.
However, judicial review challenges are typically about due process in administrative decision-making, as opposed to a means of overturning a decision based on its merits (or lack of them). So, Drax and Infinis will not seek to argue against the removal of the RSE exemption per se, but instead will contend that the court should annul the notice period of 24 days as inappropriate given the nature and consequences of the decision, and replace it with something more reasonable and proportionate.
Whether or not they will be successful remains to be seen, but this is a sensitive area for government.
One of the other key renewable subsidies is the feed in tariff regime, and it wasn’t that long ago that solar industry representatives successfully brought a judicial review case against the coalition government’s attempt in 2011 to retrospectively introduce tariff cuts – an unlawful decision which subsequently led to a successful damages claim against DECC in 2014 (under the Human Rights Act, no less).
And last year, DECC was back in court justifying another of its decisions, this time the early closure of the Renewables Obligation for large solar projects. On that occasion, however, the court decided the decision was lawful, and the application was dismissed.
So, high stakes, and don’t expect the government to cave in on this latest legal battle.
* Andrew Whitehead is Senior Partner at law firm Shakespeare Martineau and leads the firm’s Energy & Climate Change practice.