Impact of Changing CCL rates

Are you setting budgets soon?

For companies that finalise their budgets in the autumn, now is the time to consider the financial impact of CCL replacing the CRC in the next calendar year. This document outlines the impact of the changing CCL rates over the coming years. For simplicity, CRC and CCL are here referred to as energy consumption tax even though CRC is technically a levy.

The headline is that companies that are caught by the CRC will, in the short term at least, end up paying less energy consumption tax overall after the closure of the CRC. This is despite the increase in CCL line item on energy invoices. The main difference will be that the energy consumption tax, which is currently being captured partially via the energy invoices and partially via CRC, will be paid entirely via energy invoices instead.

Meanwhile, companies that are not caught by the CRC will face a significant increase in energy consumption tax, as they will not be accustomed to including a similar sum in their budgets each year to cover CRC costs.

What is changing?

The CRC Energy Efficiency Scheme will officially close at the end of Phase 2. This means that Phase 2 Year 5 (2018-19) will be the final reporting year and the final payment will be due September 2019.

While the reporting side of the CRC Scheme will be replaced by the awaited SECR legislation, the revenue will be recouped via increased CCL rates.

What is CCL?

The CCL is an energy consumption tax that encourages UK businesses to improve their energy performance. This tax is a line item on business’ energy invoices. It applies to ‘taxable commodities’ (as per Section 2.1 here), which includes electricity and natural gas. This document considers only the CCL rates for electricity and natural gas.

How is this changing?

Currently, the CCL rates have been creeping up year on year, increasing by less than 3% annually. From 1st April 2018 to 1st April 2019, however, the Government plans to raise the CCL by 45% for electricity and 67% for natural gas. This is illustrated for electricity and natural gas in the table below.

Taxable commodity Rate from 1 April 2018 Rate from 1 April 2019
Electricity (£ per kWh)  £   0.00583  £   0.00847
Natural gas (£ per kWh)  £   0.00203  £   0.00339

What does this mean for CRC participants?

In short, the rate increase of the CCL from April 2019 coincides with the end of the CRC scheme, and so CRC participants’ overall energy consumption tax will drop considerably in 2019-20.

This is modelled below for a CRC participant that consumes 1,000,000 kWh of electricity and 1,000,000 kWh of natural gas each year from now to 2020. To give some context, this CRC participant would currently be spending roughly £140,000 annually on their energy bills.

For this company, although the CCL cost will increase markedly in 2019-20, the removal of any CRC costs after the scheme is scrapped will result in a net saving. In the meantime, the CCL rate increase from now until 2018-19 is marginal, so that there is, at no point, a full ‘double payment’ of CCL and CRC. CRE Service Charge budgets will, however, need to take the increased cost into account for the full 2019 calendar year.

What does this mean for CRC non-participants?

Companies that are not caught by the CRC will face a significant increase in energy consumption tax payable from 2019-20 onwards, as they will not be accustomed to including a similar sum in their budgets for CRC payments.

This is modelled below for a CRC non-participant that consumes 1,000,000 kWh of electricity and 1,000,000 kWh of natural gas each year from now to 2020. As in the model above, this CRC participant would currently be spending roughly £140,000 annually on their energy bills.

CCL exemptions and reliefs

CCL is paid by businesses operating in the industrial, commercial, agricultural and public services sectors.

Exemptions and reliefs are in place at both ends of the scale, both for energy intensive and energy-light businesses. Businesses that are energy intensive may enter a CCA (Climate Change Agreement) with the EA and subsequently benefit from a 65% discount on CCL rates. This is set to continue to 2019. Businesses that consume negligible quantities of energy (as per Section 2.5 here) are exempt from CCL. Charities may also be exempt. Please refer to the gov.uk page for further details.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508193/HMT_Budget_2016_Web_Accessible.pdf

The 2017-18 emission factors have been applied as a proxy for the actual emission factors for 2017-18, 2018-19 and 2019-20.

Note that CCL costs are paid as a line item on energy invoices and so there is therefore some overlap between the increased CCL cost on energy invoices from April 2019 to September 2019, and the final CRC buy to comply payment in September 2019.

As before, the 2017-18 emission factors have been applied as a proxy for the actual emission factors for 2017-18, 2018-19 and 2019-20.