Government incentives for CHP schemes
Installing CHP plant can lead to significant fuel, cost and emissions savings over conventional, separate forms of power generation and heat-only boilers. However, capital costs are high and payback periods can be long. The UK Government has introduced a number of fiscal and financial support mechanisms designed to improve the economics of low carbon energy generation technologies, including CHP. Both fossil fuel and renewable fuel fired CHP plant may qualify for support from the following three schemes:
- Climate Change Levy Exemption
- Enhanced Capital Allowances
- Business Rates Exemption
Renewable CHP technologies may also qualify for support from the following renewable energy incentive schemes:
- Renewables Obligation
- Renewables Heat Incentive
- Feed-in Tariff
Fossil fuel fired CHP schemes fuelled by hydrocarbon oils may qualify for support from:
- Hydrocarbon Oil Duty Relief
Any support received from the above programmes is in addition to the commercial value of any heat and power generated.
Climate Change Levy Exemption
The Climate Change Levy (CCL) was introduced by the UK Government in 2001 and is charged on most non-domestic supplies of energy used as fuel for lighting, heating and power. The CCL is designed to promote energy efficiency and encourage investment in energy saving equipment, thereby reducing emissions of greenhouse gases. CHP schemes that are fully or partially certified as “Good Quality CHP” under the CHPQA programme and have obtained a Secretary of State (CHP) Exemption Certificate are exempt from the main rates of CCL on
- the fuel they utilise (assuming they meet a power efficiency threshold of 20% otherwise this exemption is scaled back)
- the direct and self-supplies of the power output generated (assuming the QI is met, otherwise the qualifying power output (QPO) is scaled back).
Indirect supplies (that is, supplies to the final consumer made by electricity utilities) of QPO electricity are only exempt from the main rates of CCL where the electricity was generated before 1 April 2013 (as evidenced by CHP LECs). Information note - Closure of the CHP LEC scheme: March 2013 was the last month of generation eligible for CHP LECs.
For Further Information see
Enhanced Capital Allowances
The Enhanced Capital Allowances (ECA) scheme allows businesses to write-off 100% of their investment in those energy saving technologies that are listed in the Energy Technology Criteria List (ETL) against the taxable profits of the period during which they make the investment. ECAs are claimed in the same way as other capital allowances on the Corporation Tax Return for companies and the Income Tax Return for individuals and partnerships. One of the qualifying technologies is good quality CHP. In order to qualify for ECAs, a CHP plant must be certificated under the CHPQA programme and have a Secretary of State (SoS) Certificate of Energy Efficiency.
Be aware that for the purposes of CHP:
- ECAs are not available to a business whose main turnover is derived from electricity production to unknown end users (that is, from the sale of electricity to the grid, rather than, for example, from the production of heat and electricity for clearly identified users on site or to known third parties).
- In addition, ECAs are not available to a company in a company group, where the core business of the group is electricity production, regardless of whether the subsidiary company sells electricity to known end users or to unspecified third parties.
Note: From April 2008, loss making companies can also realise the tax benefit of their investment in ETL qualifying technologies through claiming first-year tax credits (also referred to as payable ECAs). Contact HMRC for further details.
Business Rating Exemption
The rating exemption applies to specified plant and machinery contained within CHP Schemes that are fully or partially certified as “Good Quality CHP” under the CHPQA programme and have obtained a Secretary of State (CHP) Exemption Certificate. The exemption extends to accessories associated with the power generating plant and machinery (these items may be rateable in their own right elsewhere in the P & M Schedule) but not to heat recovery plant and machinery.
The valuation for rating is calculated differently for stand-alone CHP generators than for embedded CHP plant. The ratings for the former use a ‘receipts and expenditure (R&E)’ valuation methodology, based on a ‘landlord’ and ‘tenant’ approach whilst CHP plants which form part of a larger site are assessed as part of that ‘hereditament’*.
The nearest Valuation Office to any hereditament is to be found under Valuation Office Agency (VOA) in the telephone directory or see. In Scotland, applications should be directed to the Assessor for the local Council or Valuation Joint Board. Contact information for Assessors is available from the local Council.
The Renewables Obligation was introduced in 2002 to support electricity generation from renewable sources. It places a mandatory requirement on UK electricity suppliers to source a growing percentage of electricity from eligible renewable generation capacity. Suppliers are required to produce evidence of their compliance with this obligation via certificates, referred to as Renewables Obligation Certificates (ROCs). Currently each ROC represents 1MWe of electricity generated from eligible renewable sources.
A new Renewables Obligation Order came into effect on 1st April 2009. Key Features:
- Introduction of the concept of “banding” which provides varying levels of support (ROCs/MWh) for different types of renewable generation
- Enhanced support for schemes fuelled by energy crops
- Increased level of support to Good Quality (GQ) CHP over power-only schemes (Dedicated biomass, Energy from Waste, and co-firing of biomass & energy crops)
- Continued support for GQ CHP fuelled by waste
For GQ CHP, the power output eligible for the award of ROCs is determined using the relationship: Eligible Power Output = Net Power Output X Biomass Content (%) X Qualifying Power Output/Total Power Output
Eligible renewable CHP technologies and support levels The rate at which renewable fuel fired CHP schemes receive ROCs is dependent on the fuel type and technology used.
In 2012 DECC undertook a review of the Renewables Obligation. The Government response to the consultation on proposals for the levels of banded support under the Renewables Obligation for the period 2013-17 and the Renewable Obligation Order 2012 was published in July 2012.
A table summarising the banding levels: See ROC bands of all technologies
Renewable Heat Incentive
The Renewable Heat Incentive (RHI), launched in November 2011, is a DECC initiative designed to provide support to renewable heat technologies in order to increase deployment and aid market development with the ultimate aim of reducing cost of installation. Any useful heat produced by a renewable fuel fired CHP generator that is used for process, water, space or district heating will qualify for RHI payments only if the ROC uplift for GQCHP is not claimed. Qualifying useful heat must be measured by correctly installed heat metering equipment. Note that heat utilised to produce or process the renewable fuel, or used for electricity generation does not qualify for RHI.
Eligible renewable CHP technologies and support levels
The rate at which RHI is paid to a renewable CHP plant is dependent on its thermal output capacity and fuel type. The following table shows RHI tariff banding and rates relevant to renewable CHP:
- Eligible technology: Solid biomass including solid biomass contained in municipal solid waste (incl. CHP)
|Tariff band name||Eligible sizes||Current Applicable Tariffs for 1 April 2014 p/KWh|
|Small Commercial Biomass||Less than 200 kWth||Tier 1: 8.8 & Tier 2: 2.3|
|Medium Commercial Biomass||200 kWth and above; less than 1,000 kWth||Tier 1: 5.4 & Tier 2: 2.3|
|Large Commercial Biomass||1,000 kWth and above||1.0|
For small and medium scale solid biomass technologies, the tier one tariff rate applies up to the tier break. The tier break is defined as the installed thermal capacity of the CHP unit multiplied by 1,314 peak load hours. Tier 2 applies to any qualifying useful heat produced above the tier break.
- Eligible technology: Biomethane injection and biogas combustion, except from landfill gas
|Tariff band name||Eligible sizes||Current Applicable Tariffs for 1 April 2014 p/KWh|
|Biomethane and biogas combustion||Biomethane all scales, biogas combustion less than 200 kWth||7.5|
For further information on:
The Feed-in Tariff (FiT) was introduced by the UK Government in order to support renewable electricity generating technologies installed in the UK up to 5 MWe in capacity. Currently, the only renewable fuel CHP technology supported by the FiT scheme is anaerobic digestion (excluding sewage gas). Solid biomass, sewage gas and landfill gas CHP are specifically excluded from the FiT scheme on the grounds that it is considered there is adequate support available through the RO scheme. The FiT scheme also includes a pilot which provides support to domestic scale micro CHP installations. Micro CHP units are normally fuelled by natural gas and must have an installed capacity of 2 kWe or less. To be eligible for support from FiTs, qualifying micro CHP units must be installed and certified in accordance with the Microgeneration Certification Scheme (MCS). Any other technology and scale of project must be accredited through a process based on the existing Renewable Obligation process, known as the ROO-FIT process. Note that the FiT micro CHP pilot will support up to 30,000 installations, with a review to start once 12,000 installations are complete.
In order to qualify for the FiT scheme, qualifying CHP generators must be connected to the grid via an import / export meter. FiTs are payable for each unit of electricity generated whether used on-site or exported to the grid. In addition to the generation tariff, any power exported to the grid is also eligible for the export tariff. The tariff rates are adjusted annually by the percentage increase or decrease in the Retail Price Index over the 12 month period ending on 31 December of the previous year.
DECC is responsible for the policy and regulation that support the FiT scheme. The scheme is administered by Licenced Electricity Suppliers and Ofgem. It is the responsibility of FiT Licenced Electricity Suppliers to support generators through the registration process, read generation and export meters and make tariff payments.
For Further Information see
Hydrocarbon Oil Duty Relief
CHP schemes that are fully or partially certified as “Good Quality CHP” under the CHPQA programme and have obtained a Secretary of State (CHP) Exemption Certificate are able to claim a refund of Hydrocarbon Oils duty on oil used to generate electricity in respect of an annual operation (assuming they meet a power efficiency threshold of 20% otherwise this exemption is scaled back to the same relevant fraction as entitlement to relief from CCL).
Interaction between the RHI and Renewables Obligation
Electricity generated by renewable CHP installations is currently supported under the Renewables Obligation (RO) scheme. The level of support received is determined by the installation’s RO banding which is dependent on the technology and/or feedstock utilised. Provided that the renewable CHP installation is registered as ‘good quality CHP’ (GQCHP) under the CHP Quality Assurance (CHPQA) scheme the installation is also eligible for an uplift on the relevant RO banding (e.g. dedicated biomass with CHP). The GQCHP uplift is designed to support the renewable heat generated by the plant and is equivalent to an additional 0.5 Renewable Obligation Certificates (ROC) per MWhe of power generated.
In addition to the GQCHP uplift, installations registered as GQCHP may also claim Enhanced Capital Allowances (ECA).
A new renewable CHP installation may also opt to receive support under the new Renewables Heat Incentive (RHI). Currently, the RHI is payable for any useful heat generated provided it is not used for power generation or used within renewable energy system itself e.g. to heat an anaerobic digester. This is currently in addition to support under the RO for the electricity generated. However, a CHP will not be eligible for the RHI where it is fuelled by solid biomass (including solid biomass contained in municipal waste), is accredited under the Renewables Obligation and has at any point received accreditation under CHPQA Guidance Note 44 (been issued with a GN44 ‘ROC eligible’ certificate).
In addition to this, a renewable CHP plant claiming RHI (or FiTs) may not claim support under the ECA, ECAs may still be claimed (subject to the other conditions of the ECA scheme) from April 2014 onwards in respect of expenditure on such equipment as long as no tariffs are paid. Any ECAs given, in respect of expenditure incurred from April 2014 for CHP installations, will be withdrawn if FiTs or RHI tariffs are paid subsequently.
In summary a new renewable CHP installation currently has two options through which to receive support:
- Register as GQCHP and claim ROCs, including the 0.5 ROC uplift, and ECA
- Claim RHI and ROCs excluding the ROC uplift and ECAs
Note that the Government recent review on the levels of banded support under the RO for the period between 2013 and 2017, and it is proposed to end the GQCHP uplift for new stations accredited on or after 1st April 2015. All new CHP stations accredited from this date onwards will instead receive support from a combination of the RO and RHI. A transition period will run between 1st April 2013 and 31st March 2015 where developers of new accreditations and new additional capacity will have a one off choice between the GQCHP uplift or RHI support. The GQCHP uplift will be grandfathered for all CHP stations accredited prior to 1st April 2013 which have at any time claimed the GQCHP uplift. Furthermore, all new CHP stations accredited during the transition period that chose the GQCHP uplift shall also be grandfathered.