Form

Compensation for the indirect costs of the UK ETS and the CPS mechanism: guidance for applicants

Updated 12 June 2022

Introduction

The UK government is committed to reducing greenhouse gas emissions and in June 2019 became the first major economy in the world to pass laws to end its contribution to global warming by 2050 ^{[footnote 1]}.

In November 2020, the UK also set out its Ten Point Plan for a Green Industrial Revolution. This net zero emissions target requires a transformation of the UK economy, including the energy market, while keeping energy costs down for businesses and consumers, and maintaining competitiveness.

A key driver for investment in low carbon technologies, including electricity generation, is carbon pricing. Following the UK’s exit from the European Union, the UK introduced a UK Emissions Trading Scheme (UK ETS) to replace the UK participation in the EU Emissions Trading System (EU ETS). The UK Government introduced a carbon price support mechanism (CPS) in 2013 in addition to the then EU ETS.

The government recognises that carbon pricing through the UK ETS and CPS will have a knock-on effect on the wholesale electricity price and increase retail electricity prices in the short to medium term. A high carbon price can make electricity prices less competitive and increase the risk of carbon leakage ^{[footnote 2]} for the UK’s most electricity-intensive businesses, particularly those which operate in internationally competitive markets and are unable to pass these indirect emission costs through to consumers.

In recognition of this, the government will compensate those electricity intensive industries deemed to be exposed to a significant risk of carbon leakage due to the indirect emission costs of the UK ETS and CPS. This guidance sets out how businesses can apply for this compensation scheme.

Eligibility

There are 2 steps to assessing whether a business is eligible to claim compensation for the indirect costs of the UK ETS/CPS:

• the business must manufacture a product in the UK within an eligible sector (determined by reference to the 4-digit SIC code) ^{[footnote 3]}

• the business must pass a 5% filter test

In this guidance the ‘applicant’ refers to the legal entity manufacturing a product in GB. This will typically be a business registered at Companies House.

Eligible sectors

The list of eligible sectors applies to compensation for the indirect costs of both the UK ETS and CPS ^{[footnote 4]}. Applicants will need to establish that they manufacture a product which falls within one of the eligible 4-digit SIC codes in Table 1 below ^{[footnote 5]}. If a business does not manufacture a product in Table 1 it will not be eligible. Businesses that sell or resell eligible products without having manufactured them are not eligible.

Table 1: list of eligible sectors

SIC code

Description

1310	Preparation and spinning of cotton-type fibres

1411	Manufacture of leather clothes

1621	Manufacture of veneer sheets and wood-based panels

1711	Manufacture of pulp

1712	Manufacture of paper and paperboard

2013	Manufacture of other inorganic basic chemicals

2014	Manufacture of other organic basic chemicals

2015	Manufacture of fertilisers and nitrogen compounds

2314	Manufacture of glass fibres

2410	Manufacture of basic iron and steel and of ferro-alloys

2442	Aluminium production

2443	Lead, zinc and tin production

2444	Copper production

2720	Manufacture of batteries and accumulators

The 5% test

To ensure that compensation is appropriately targeted, businesses will also need to pass the ‘5% test’. To do this they will need to show that their indirect carbon costs amount to 5% or more of their GVA. Annex A sets out a worked example of how the 5% test is calculated.

The ‘5% test’ is based on the quantitative test which was previously applied for the purposes of the EU ETS when developing the list of eligible sectors and sub-sectors. To pass the 5% test a business must do both of the following:

• meet the test on a mean average basis over the past 5 years concerned for which full financial accounts are available

• be above the 5% line for at least 3 of the 5 years

In calculating the indirect cost for eligibility for compensation, a business will need to apply the following carbon price and GVA data:

• indirect carbon cost of £41.44/MWh ^{[footnote 6]} in real 2022 prices

• average GVA data over the reference period (2017/18 – 2022/23) in 2022 prices. GVA is calculated as earnings before interest, taxation, depreciation and amortization (EBITDA) plus staff costs. GVA is in real terms and calculated by adjusting nominal GVA using HMT’s GDP deflator ^{[footnote 7]}

• if published accounts are not available for the latest year, we will accept draft GVA figures which are supported by management accounts. In certain cases we may request audited accounts

For the purposes of the 5% test, electricity costs and GVA should be calculated at the aggregate “business” level – “business” meaning the legal entity which is manufacturing the eligible product.

To ensure that we do not compensate businesses that only pass this test because over the reference period they have negative GVA, any years with negative GVA will be treated as having a value of zero.

If available, businesses must use data from the past five years for which full financial accounts are available (the reference period). For FY 22/23 the scheme will operate on a multi-annual baseline period, whereby firms’ level of compensation is determined initially using a 5- year period of historic data, where annual accounts are available. Within this firms will have the option to exclude FY 20/21 and 21/22 from their baseline to account for the impacts of the Covid-19 pandemic. For a business which did not operate for all years in this reference period, eligibility will be calculated using the latest data available, with a minimum of two quarters of data required, up to the last three years of production. Once a business has three years of historic production on record, eligibility will be recalculated using the average of the last three years on record.

We recognise that there is a risk that some businesses which manufacture eligible electricity intensive products may fail the 5% test by virtue of their structure – for example a business may manufacture other non-intensive product(s) which lowers its overall aggregate level of electricity intensity. A business may therefore be treated as passing the 5% test if it can demonstrate to the satisfaction of the Secretary of State that either:

• the business only fails the 5% test because of the inclusion of business activity which does not relate to the manufacture of the eligible product(s)

• a business which manufactures the same product in the UK has passed the 5% test and is eligible for compensation

The compensation schemes will be operated in compliance with the UK Subsidy Control Act and the Windsor Framework.

Conditionality

To ensure that the compensation schemes are aligned with the wider decarbonisation goals of the Government, we expect all recipients of compensation to submit a response to a DBT questionnaire, which sets out decarbonisation pathway plans.

The completion of the template will have no implications for funding in the first year of the scheme – in other words, funding will not be clawed back from recipients in the event of non-completion or if they don’t have a current decarbonisation plan.

The Government will analyse the responses to the questionnaires and will follow up with compensation recipients as appropriate.

The government see it is appropriate to introduce more significant conditions in future years of the scheme. Those could include, for example, the obligation to implement recommendations of audit reports for recipients that are subject to the Energy Savings Opportunity Scheme (ESOS) or reduce the carbon footprint of their electricity consumption. Further alternative conditions could also be considered following engagement with relevant stakeholders.

How compensation is calculated

Whilst the 5% test requires a calculation at the aggregate ‘business-level’, the amount of compensation due is calculated using installation level data. Businesses with multiple installations will therefore need to provide the information required for each eligible installation in order to receive payments under the scheme. In this scheme an installation is defined as a stationary technical unit where one or more activities associated with the manufacture of the eligible product are carried out. This includes any other directly associated activities on that site.

Efficiency benchmarks

EU ETS efficiency benchmarks ^{[footnote 8]} for the period 2021 to 2025, will be used when calculating compensation. These benchmarks are at the PRODCOM level and are for specific electricity intensive products within the eligible sectors. These benchmarks are intended to compensate businesses for electricity usage, based on the most efficient process for the manufacture of that specific product.

Some eligible products do not have specific benchmarks (usually due to data limitations) and in these cases we will use the ‘fall-back’ value previously used. The fall-back benchmark is 0.8 meaning 80% of electricity used for the manufacture of the product is considered in the calculation formula. Where there is no specific benchmark, the government will apply this fall-back benchmark.

Subsidy intensity

Subsidy intensity will limit a company’s total indirect emission costs to 1.5% of their GVA or 75% of their total indirect emissions costs, whichever is greater in the respective years for the period April 2023 to March 2025. We currently apply this maximum subsidy intensity level. However, we have set an overall budget limit for this scheme and if there is a risk of budget over-spend, we may choose to reduce the subsidy intensity. If we do this, we will update this guidance and notify businesses in receipt of UK ETS or CPS compensation first.

CO2 emissions factor

The cost of the UK ETS and CPS faced by electricity generators is based on the amount of carbon consumed and emitted. From 1 April 2022, we will use the DUKES estimates for the CO2 emissions per GWh of fossil fuel generated electricity supplied in the UK. This annual value is determined by taking the tonnes of CO2 emitted for the power generation sector as a whole in the most recent year of data and dividing it by the total MWh of electricity supplied by fossil fuels in that year. For the UK this is 0.4344 tCO2/MWh in 2023

We will use DUKES’ annual figures to calculate compensation. In practice this means that we will apply the CO2 emission factor in year t based on a statistic from year t-2 publish in DUKES t-1 for at least the next three years. For example, in the formula to calculate the level of compensation in scheme year 2022/23 we would apply the CO2 emission factor from year 2020 published in DUKES 2021. We will update this guidance annually with the latest figure from DUKES.

The same emission factor will be applied to all sources of electricity supply whether it is eligible auto generation, electricity supply contracts or grid supply.

UK ETS reference price and CPS price

The UK ETS reference price at year t-1 (£/tCO2). This will be calculated using the mean average of the daily one-year forward UK ETS prices (closing offer prices) for delivery in April of the year for which compensation is granted, as observed on the carbon exchange, Intercontinental Exchange, from 1 April one year to 31 March the year preceding the year for which compensation is granted. The previous scheme’s year’s average ETS price will be used to calculate compensation for the following year. For the scheme year 2023/2024 this price will be £78.37/tCO2.

In case of the price of the CPS, HMT sets the rate two years ahead of the year in which they will apply, and it is currently set at £18/tCO2.

The implementation of the dynamic baseline

Compensation calculations for the first year of the scheme were based on annual production/electricity consumption relating to the previous scheme year. For example, compensation payment for the FY2022/23 would be based on data from the FY2021/22.

As of scheme year 2023/24 we are moving from the fixed 5 year average baseline (based on data from original applications) to a dynamic 5 year moving average. For those companies with considerable non-grid/grid usage, you can also opt-in to providing estimates of this split too if after analysis you feel it would increase accuracy of final payments for the scheme year.

This means that each year we will take data from your annual returns and update your baselines with an additional year of data. The nature of the moving average will mean that older baseline data is replaced by newer information. This will lead to more accurate compensation offers.

For products with an efficiency benchmark, compensation will be determined using the ‘dynamic baseline output’ of the product. The ‘Dynamic baseline output’ is calculated from the production of the eligible product in tonnes per period at the installation.

For a product without an efficiency benchmark, we will use the ‘dynamic baseline electricity consumption’ and the fall-back benchmark to calculate the amount of compensation due. The ‘Dynamic baseline electricity consumption’ is the electricity consumption in MWh associated with the manufacture of the eligible product at the installation.

Calculating UK ETS compensation for the first year

Where efficiency benchmarks are available for the products and the value of indirect carbon costs limited to 1.5% of GVA is greater than 75% subsidy intensity, amount of compensation payable in scheme year ‘t’ will equal:

Box 1: Maximum compensation amount calculation

Maximum subsidy in Year t = (C t × P t × E × BO × G t-1) – 1.5% x GVA t-1

In this formula, C t is the applicable CO2 emission factor (0.4344 tCO2/MWh) at scheme year t; P t is the UK ETS rate in scheme year t (£/tCO2); E is the applicable product-specific electricity consumption efficiency benchmark; BO is the baseline output; G is the percentage of electricity consumption which is liable for UK ETS rates in t-1 and GVA t-1 is the company’s gross value added in year t-1, where a company states they do not wish to include FY2020 and 2021, this will be the first years data available prior or post to these years.

Where there is no published benchmark available for the product in question and the value of indirect carbon costs limited to 1.5% of GVA is greater than 75% subsidy intensity, amount of compensation payable in scheme year ‘t’ will equal:

Box 2: Maximum compensation amount calculation

Maximum subsidy in Year t = (C t × P t × EF × BEC × G t-1) – 1.5% x GVA t-1

In this formula, C t is the applicable CO2 emission factor (0.4344 tCO2/MWh) at scheme year t; P t is the UK ETS rate in scheme year t (£/tCO2); EF is the fall-back electricity consumption efficiency benchmark; BEC is the baseline electricity consumption (MWh); and G is the percentage of electricity consumption which is liable for UK ETS rates in t-1 and GVA t-1 is the company’s gross value added in year t-1.

Where efficiency benchmarks are available for the products in question the amount of compensation payable in scheme year ‘t’ will equal, where the below formula is larger than the 1.5% GVA method:

Box 3: Minimum compensation amount calculation

Minimum subsidy in Year t = Si t × C t × P t × E × BO × G t-1

In this formula, Si t is the subsidy intensity at year t, expressed as a fraction (e.g. 0.75); C t is the applicable CO2 emission factor (0.4344 tCO2/MWh) at scheme year t; P t is the UK ETS rate in scheme year t (£/tCO2); E is the applicable product-specific electricity consumption efficiency benchmark; BO is the baseline output; and G is the percentage of electricity consumption which is liable for UK ETS rates in t-1.

Where there is no published benchmark available for the product in question the amount of compensation payable in scheme year ‘t’ will equal, where the below formula is larger than the 1.5% GVA method:

Box 4: Minimum compensation amount calculation

Minimum subsidy in Year t = Si t × C t × P t × EF × BEC × G t-1.

In this formula, Si t is the subsidy intensity at year t, expressed as a fraction (e.g. 0.75); C t is the applicable CO2 emission factor (0.4344 tCO2/MWh) at scheme year t; P t is the UK ETS rate in scheme year t (£/tCO2); EF is the fall-back electricity consumption efficiency benchmark; BEC is the baseline electricity consumption (MWh); and G is the percentage of electricity consumption which is liable for UK ETS rates in t-1.

There is a worked example of this calculation in Annex B

Calculating CPS compensation for the first year

Where efficiency benchmarks are available for the products and the value of indirect carbon costs limited to 1.5% of GVA is greater than 75% subsidy intensity, amount of compensation payable in scheme year ‘t’ will equal:

Box 5: Maximum compensation amount calculation

Maximum subsidy in Year t = (C t × R t × E × BO × G t-1) – 1.5% x GVA t-1

In this formula, C t is the applicable CO2 emission factor (0.4344 tCO2/MWh) at scheme year t; R t is the Carbon Price Support rate at scheme year t (£/tCO2); E is the applicable product-specific electricity consumption efficiency benchmark; BO is the baseline output; G is the percentage of electricity consumption which is liable for CPS rates in t-1.and GVA t-1 is the company’s gross value added in year t-1, where a company states they do not wish to include FY2020 and 2021, this will be the first years data available prior or post to these years.

Where there is no published benchmark available for the product and the value of indirect carbon costs limited to 1.5% of GVA is greater than 75% subsidy intensity, amount of compensation payable in scheme year ‘t’ will equal:

Box 6: Maximum compensation amount calculation

Maximum subsidy in Year t = (C t × R t × EF × BEC × G t-1) – 1.5% x GVA t-1

In this formula, C t is the applicable CO2 emission factor (0.4344 tCO2/MWh) at scheme year t; R t is the Carbon Price Support rate at scheme year t (£/tCO2); EF is the fall-back electricity consumption efficiency benchmark; BEC is the baseline electricity consumption (MWh); G is the percentage of electricity consumption which is liable for CPS rates in t-1; and GVA t-1 is the company’s gross value added in year t-1, where a company states they do not wish to include FY2020 and 2021, this will be the first years data available prior or post to these years.

Where efficiency benchmarks are available for the products in question the amount of compensation payable in scheme year ‘t’ will equal, where the below formula is larger than the 1.5% GVA method:

Box 7: Minimum compensation amount calculation

Minimum Subsidy in Year t = Si t × C t × R t × E × BO × G t-1.

In this formula, Si t is the subsidy intensity at year t, expressed as a fraction (e.g. 0.75); C t is the applicable CO2 emission factor (0.4344 tCO2/MWh) at scheme year t; R t is the Carbon Price Support rate at scheme year t (£/tCO2); E is the applicable product-specific electricity consumption efficiency benchmark; BO is the baseline output; and G is the percentage of electricity consumption which is liable for CPS rates in t-1.

Where there is no published benchmark available for the product in question the amount of compensation payable in scheme year ‘t’ will equal, where the below formula is larger than the 1.5% GVA method:

Box 8: Minimum compensation amount calculation

Minimum Subsidy in Year t = Si t × C t × R t × EF × BEC × G t-1.

In this formula, Si t is the subsidy intensity at year t, expressed as a fraction (e.g. 0.75); C t is the applicable CO2 emission factor (0.4344 tCO2/MWh) at scheme year t; R t is the Carbon Price Support rate at scheme year t (£/tCO2); EF is the fall-back electricity consumption efficiency benchmark; BEC is the baseline electricity consumption (MWh); and G is the percentage of electricity consumption which is liable for CPS rates in t-1.

Changes to ownership of installations

In many cases, a change in ownership of an installation will be largely irrelevant and there should be no break in compensation. We will need to receive information on this including the date of change of ownership to ensure payment can continue un-interrupted. This should be submitted as part of a quarterly return. We will not need to reassess eligibility. We will pay the existing owner until the day before the date of transfer and will backdate compensation for the new owner to the date of the transfer of the installation.

In cases where businesses have sold an installation but still have other installations eligible for compensation, we will need to remove the sold installation from the baseline and re-baseline.

Where a business closes an installation but still has other installations, we will remove the installation concerned from the baseline and re-baseline.

Installations making several products or a mixture of products with or without benchmarks

Compensation will only be due for the electricity associated with the manufacture of eligible products. Where an installation is manufacturing both eligible and ineligible products the business will need to identify the electricity usage associated with the eligible product using one of the following methods:

• provide evidence which clearly demonstrates the proportion of their electricity usage associated with the manufacture of the product in question – preferably, in the form of sub-metered records
• base the electricity usage associated with the manufacture of an eligible product on the amount of that product being made (in tonnage) as a proportion of total production of all products

Installations with on-site electricity production

For those applicants with non-grid electricity consumption, we will use data on the grid/non-grid split from the most recent scheme year to calculate compensation. For example, for compensation in 2022/23 we will use 2021/22 data.

Where businesses use auto generation, compensation will be due as follows.

For UK ETS and CPS

Renewable auto-generation: no compensation will be due.

Biomass co-firing: compensation will be due according to the percentage of fossil fuels used. In these cases, businesses should provide information which is consistent with that which is provided to HMRC for the purposes of the CPS calculation. The calculation of compensation of eligible electricity will be based on the % of the previous scheme year’s fossil fuel use (for example compensation for 2022/23 will be based on the percentage of fossil fuel used in 2021 and reported in the end of year report in early 2022).

For UK ETS only

Non-renewable Combined Heat and Power (CHP)

Compensation will be due for the electricity generated and used for production purposes only and not for any electricity which is exported to the grid.

For CPS only

Non-renewable combined heat and power (CHP)

Electricity generated through good quality CHPQA (the Combined Heat and Power Quality Assurance Programme) is exempt from the CPS and will therefore not be compensated.

Electricity generated from waste gases

This does not result in CPS costs and does not therefore warrant compensation.

Other generation deemed not liable to pay CPS rates by HMRC will not be compensated. This notice also provides guidance on how CHP is treated in the context of the CPS and includes information on the GQCHP Programme.

Installations in Northern Ireland

Energy Intensive Industries in Northern Ireland will not be eligible for the ETS compensation scheme at this point in time. If compensation is to be introduced in the future, this will be in the form of a separate scheme designed to be compliant with the Windsor Framework. The CPS does not apply to Northern Ireland and therefore firms in Northern Ireland are not exposed to its indirect costs.

• Please declare on the BO3 form whether you have any subsidiaries in Northern Ireland.
• These subsidiaries will not be eligible for compensation under the scheme and there must be no transfer of compensation to these subsidiaries.

Scheme administration

The compensation schemes for the indirect costs of the UK ETS/CPS are administered by the Department for Business and Trade (DBT) with payments being made quarterly and in arrears.

The process

There will be 3 administrative processes which will need to be undertaken by all applicants for the scheme commencing 2022/23:

1. The initial application form: completed at the outset of the claim. This forms the basis of the decision on eligibility and the calculation of compensation.

2. The quarterly declaration: This should contain previous quarters electricity consumption or production tonnage, confirming that circumstances are largely unchanged, or notifying significant changes in levels of production, site closures or new installations. A satisfactory declaration will prompt the quarterly payment and should avoid unnecessary under/overpayments.

3. Annual return: setting out annual totals for tonnage produced and auto-generation at installation level for eligible products only, if possible.

The initial application form

The application form consists of 2 documents. The application form asks for information to help manage the schemes and the excel spreadsheets (forms B03 and B04) ask for electricity consumption and financial data. All businesses wishing to apply for relief from the indirect costs of UK ETS/CPS should complete these forms and submit them via email to energyintensiveindustries@beis.gov.uk. The application form requires the following information.

For eligibility purposes:

• business’s name and evidence of its legal status (for example Companies House registration number)
• contact name and details including role in the business
• business’s overall electricity usage over the reference period (or over an alternative period outlined in this guidance if applicable)
• the aggregated GVA ^{[footnote 9]} over the reference period of 2016/17 to 2021/22
• the product(s) produced by the applicant as defined at the 8-digit ‘PRODCOM’ level, which falls within one of the eligible 4-digit SIC codes
• all staff costs (direct and indirect) including pension and National Insurance contributions (over the reference period 2016/17 to 2021/22) ^{[footnote 10]}

Confirmation of commitment to have submitted a business decarbonisation plan.

For compensation calculation purposes:

• details of installations being claimed for
• the output of eligible product (tonnage, from 2016/17 to 2021/22, or over an alternative period outlined in this guidance, if applicable) for each installation being claimed for
• the electricity usage associated with the output of other (non-eligible) manufactured products at the relevant installations, if applicable
• details of any electricity from auto-generation or other non-grid sources – the nature of the generation and how much is used for the manufacture of eligible product
• bank account details

For monitoring and evaluation purposes:

• total capital expenditure in the UK ^{[footnote 11]}
• total Capital Expenditure split on new and existing assets ^{[footnote 12]}
• average wage reported for each installation run ^{[footnote 13]}
• annual earnings before interest, taxes, depreciation and amortization (EBITDA)

Following receipt of the initial application form with satisfactory supporting information, DBT will assess the applicant’s eligibility and issue a letter to the business which will confirm whether the business is eligible for compensation or not, for which product(s) compensation will be payable, the quarterly payment rate, and when quarterly declarations will be due.

Successful applicants will be compensated from the start of the month in which their application is received. For applications made by 30 June 2022, the payments will be backdated to the start of Q1 FY 2022.

Where data is not provided a valid reason for this must be submitted within the application and will be assessed on a case-by-case basis.

Quarterly declaration

Quarterly declarations should also be submitted via email to energyintensiveindustries@beis.gov.uk. The form will require businesses to submit the following information:

• confirmation that the business is still in operation
• confirmation that no significant changes have occurred
• if significant changes have occurred, or are predicted to occur, details of these changes, for example changes in production or details of any closed, opened or purchased installations
• the previous quarters electricity consumption or tonnage, depending on whether the product has a benchmark

The quarterly declaration should be submitted as soon as possible following the 3-month period in question – that is from the first day after the period in question. If the quarterly declaration has not been submitted after a month has passed following the period in question, DBT will issue a reminder to the business via email. If the declaration has not been returned by the business by the time the next quarterly declaration is due (that is by the first day after the subsequent 3-month period), the business’s compensation claim will be stopped. Non-receipt of the email reminder cannot be used as a reason for non-return of the declaration form.

For each year of the scheme if changes occur which significantly affect the levels of annual production (changes to levels of production as set out in the baseline output and baseline electricity consumption sections) and therefore the amount of annual compensation due, DBT will recalculate the annual amount of compensation due, considering the new information.

If an installation significantly reduces its production of eligible products in eligible sectors in a given calendar year, aid will be reduced corresponding to the baseline output/electricity consumption as follows:

• if less than 50% there will no reduction in the aid amount
• if between 50% and 75% an installation will only receive 50% of the aid amount
• if between 75% and 90% an installation will only receive 25% of the aid amount
• if by 90% or more an installation will not receive any compensation

If an installation has a significant capacity reduction in one calendar year this will also apply to the next year’s compensation. A business can submit production forecasts to prevent this output reduction from being applied to the next year’s compensation calculations. These will only be taken into account if the Secretary of State is satisfied that the forecasts are sufficiently reliable to constitute evidence.

Following receipt of the quarterly declaration and provided everything is as expected, DBT will make a payment directly into the business’s bank account.

Annual return

Businesses will be required to submit an end of scheme year return which will require the following:

• a breakdown of production for the scheme year broken down by PRODCOM codes in tonnes and by installation
• the firms GVA for the previous year. If published accounts are not available we will accept draft GVA figures which are supported by management accounts. In certain cases we may request audited accounts
  • if using draft GVA we will reconcile against the final, published GVA figures at the end of the Scheme Year as part of the routine annual return process

Where the annual return indicates under or overpayment, adjustments will be made to future payments. The correction will be made as quickly as possible and will apply to historic, as well as prospective, compensation payments.

Appeals

Businesses can appeal against decisions made regarding their eligibility or level of compensation if they consider that a decision is incorrect.

Appeals should be made in writing and can be sent via email to energyintensiveindustries@beis.gov.uk. They should clearly state that an appeal is being made, set out the grounds for appeal and be accompanied by any supporting evidence/documents that are to be relied on. Appeals will be determined on paper not via any oral hearing.

Appeals must be made within 20 working days of the date of the original decision (i.e. the date of the decision letter). Following receipt of an appeal DBT will send an acknowledgement of receipt within 2 weeks and will seek to reach a decision on the appeal within 8 weeks of receipt of appeal.

Change of details

Any change of business details – for example, names, addresses, and bank account details – should be provided to DBT as soon as possible in writing.

Value Added Tax

Compensation payments for the UK ETS/CPS schemes are not subject to Value Added Tax.

When reporting electricity costs in the initial application, Value Added Tax should be excluded.

Data protection and transparency

We recognise that businesses will be required to provide commercially sensitive data to DBT and, unless we consider that we are legally required to do so, we do not intend to make public commercially sensitive business data.

Within six months from the granting of the subsidy, the following information will be collected and made publicly available via DBT transparency database ^{[footnote 14]}:

(a) the legal basis and policy objective or purpose of the subsidy.

(b) the name of the recipient of the subsidy when available;

(c) the date of the grant of the subsidy, the duration of the subsidy and any other time limits attached to the subsidy; and

(d) the amount of the subsidy or the amount budgeted for the subsidy”.

Otherwise, unless DBT considers that it is legally required to make further information available, DBT will only publish the names of businesses receiving compensation and will not publish details of unsuccessful applicants.

For Data Protection enquiries, your contact is:

The Data Protection Officer
Department for Business and Trade
1 Victoria Street
London
SW1H 0ET

Telephone number: 020 7215 6635

Monitoring and assurance

The information provided by businesses, including the nature of the product(s) made, the scale of production and the costs being faced must be accurate. We will undertake additional validation and checks if we feel they are necessary.

DBT will monitor applications and compensation paid and will from time to time undertake further validation or investigation. This will include but is not limited to:

• where a business is claiming a significant amount of compensation
• where a case is complex – for example, a restructured business or an installation manufacturing several products
• where the information being provided is significantly different from that declared with Companies House
• a random check of a sample of cases, by a DBT official. In some cases, an independent verifier may also be used

Annex A: the 5% test calculation

An example of the 5% test

Cost impact = consumption (MWh) x price impact (£/MWh) divided by GVA (£)

Consumption and GVA are averages over the reference period, excluding the two Covid years of FY 2020 and 2021 from this average. The terms are defined as follows.

Consumption

Consumption is average electricity consumption (MWh) by the business over the period 2016 to 2021.

Price impact

Price impact is impact of the UK ETS and CPS in 2022, assumed to increase electricity prices by £41.44/MWh in real 2022 prices

GVA

GVA is the average real gross value added (GVA) (£) over the period 2016 to 2021 in 2021 prices, excluding the years 2020 and 2021

GVA is calculated as ‘Earnings before interest, taxes, depreciation, and amortisation (EBITDA) plus staff costs (including directors’ remuneration, employers’ pension and national insurance contributions)’.

GVA is in real terms and calculated by adjusting nominal GVA using HMT’s GDP deflator. Adjustment factors are shown in the following worked example.

Worked example for the 5% test

An example calculation of the 5% test

COST IMPACT = (CONSUMPTION (MWh) x PRICE IMPACT (£/MWh)) / (GVA (£))

CONSUMPTION and GVA are averages over the reference period. The terms are defined as:

• CONSUMPTION is electricity consumption (MWh) by the business over the previous year (here it is 2020/2021)
• PRICE IMPACT is average impact of the UK ETS and CPS for the reference period FY 2016-2021, assumed to increase electricity prices by £35.24/MWh in real 2021 prices (this is an illustrative example and is not based on real data).
• GVA = Average real gross value added (GVA) (£) over the period 2016 to 2021 in 2021 prices, excluding the pandemic years of 2020 and 2021. GVA is calculated as “Earnings before interest, taxes, depreciation, and amortisation (EBITDA) plus staff costs (including directors’ remuneration, employers’ pension, and national insurance contributions)”. GVA is in real terms and calculated by adjusting nominal GVA using HMT’s GDP deflator. Adjustment factors are shown in the following worked example.

Worked Example

A firm has the following figures for electricity consumption, EBITDA, and staff costs:

	2016/17	2017/18	2018/19	2019/20	2020/21	2021/22	Average (exc. 2020 2021)
Electricity (MWh)	50	50	60	60	40	40	55
EBITDA (a)	2,500	3,000	3,500	3,000	(100)	0
Staff costs (b)	5,000	5,500	6,000	5,500	4,000	3,000
GVA (a + b)	7,500	8,500	9,500	8,500	3,900	3,000
Deflator	1.16	1.15	1.12	1.11	1.08	1
Real GVA	8,700	9,775	10,640	9,435	4,212	3,000	9,638

• Step 1 – GVA in each year is calculated by summing EBITDA and staff costs. For example, in 2016 the business made £2,500 profit with staff costs of £5,000 and had GVA of £7,500 (2,500 + 5,000)
• Step 2 – real GVA is calculated by multiplying GVA by the deflator. For example, in 2016 nominal GVA of 7,500 is multiplied by 1.16 to give a real GVA (in 2021 prices) of £8,700
• Step 3 – electricity consumption and real GVA is averaged over the period. Excluding 2020 and2021 from this average maximises the cost impact, so we exclude this year. For example, electricity consumption in each year is summed and divided by the number of years – (50 + 60 + 60 + 50) / 4 = 55MWh
• Step 4 – cost impact is calculated by multiplying average electricity consumption by the price impact of £35.24/MWh. For example, average electricity consumption of 50 × 35.24 = £1,762
• Step 5 – cost impact as a proportion of GVA is calculated by dividing the average cost impact (£1,762) by average real GVA (£9,638) = 18%

In the example above the business has a cost impact as a proportion of GVA of 18%.

Annex B: Compensation Calculation

Worked example for the calculation of compensation for a product with a published efficiency benchmark

CO2 Emissions Factor

The cost of the UK ETS and CPS faced by electricity generators is based on the amount of carbon consumed and emitted. From 1 April 2022, we will use the DUKES estimates for the CO2 emissions per GWh of fossil fuel generated electricity supplied in the UK. This annual value is determined by taking the tonnes of CO2 emitted for the power generation sector as a whole in the most recent year of data and dividing it by the total MWh of electricity supplied by fossil fuels in that year. For the UK this is 0.4344 tCO2/MWh in 2023.

ETS price

The UK ETS reference price at year t-1 (£/tCO2). This will be calculated using the mean average of the daily one-year forward UK ETS prices (closing offer prices) for delivery in April of the year for which compensation is granted, as observed on the carbon exchange, Intercontinental Exchange, from 1 April one year to 31 March the year preceding the year for which compensation is granted. The previous scheme year’s average ETS price will be used to calculate compensation for the following year. For the scheme year 2023/2024 this price will be £78.37/tCO2.

Product Specific electricity consumption efficiency benchmark

EU ETS efficiency benchmarks will be used when calculating compensation. These benchmarks are at the PRODCOM level and are for specific electricity intensive products within the eligible sectors. These benchmarks are intended to compensate businesses for electricity usage, based on the most efficient process for the manufacture of that specific product. level and are for specific electricity intensive products within the eligible sectors. These benchmarks are intended to compensate businesses for electricity usage, based on the most efficient process for the manufacture of that specific product.

Baseline Output

Baseline Output refers to the average tonnage produced per eligible product over the baseline period (FY2016- 2021, excluding 2020 2021 if chosen)

Worked example 2

Within this example, the firm has not chosen to remove FY 2020 and 2021, they produce a product with product specific electricity consumption efficiency benchmark.

An example calculation for ETS compensation for a business

• GVA = Average real gross value added (GVA) (£) over the period 2016 to 2021 in 2021 prices, excluding the Covid -19 pandemic years of FY 2020 and 2021. GVA is calculated as “Earnings before interest, taxes, depreciation, and amortisation (EBITDA) plus staff costs (including directors’ remuneration, employers’ pension, and national insurance contributions)”. GVA is in real terms and calculated by adjusting nominal GVA using HMT’s GDP deflator. Adjustment factors are shown in the following worked example.
• The product has an electricity consumption efficiency benchmark of 0.3 with 100% of the firm’s electricity being eligible for ETS and CPS.

Worked Example

A firm has the following figures for electricity consumption, EBITDA, and staff costs:

	2016/17	2017/18	2018/19	2019/20	2020/21	2021/22	Average
Output (tonnes)	50	50	60	60	40	40	50
EBITDA (a)	2,500	3,000	3,500	3,000	(100)	0
Staff costs (b)	5,000	5,500	6,000	5,500	4,000	3,000
GVA (a + b)	7,500	8,500	9,500	8,500	3,900	3,000

• Step 1 – Calculate 1.5% of a firms GVA based on t-1 - (3000/100) × 1.5 = £45
• Step 2 – Calculate the total ETS cost for the firm. - (C t × P t × E × BO × G t-1): (0.44 × 62.10 ×0.3 × 50 × 1) = £409.86
• Step 3 – Calculate the total CPS cost for the firm - (C t × R t × EF × BO × G t-1): (0.44 × 18 × 0.3 × 50 ×1) = £118.8
• Step 4 – Sum the ETS and CPS costs – (£409.86 + £118.8) = £528.66
• Step 5 – Limit the firms’ costs to 1.5% of their GVA by subtracting this value from their total indirect carbon costs - £528.66 – £45 = £483.66

This firm will receive £483.66 in compensation. This represents a subsidy intensity of 91% in this worked example.

1. UK becomes first major economy to pass net zero emissions law ↩

2. Carbon leakage refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production or reallocate future investments to other countries with more relaxed emission constraints or carbon policies. ↩

3. This is in reference to the SIC Codes 2007. ↩

4. Indirect UK ETS and CPS costs – the UK ETS and CPS costs faced by electricity generators and passed through to the industrial consumer through their electricity bill. ↩

5. The first 4 digits of an 8-digit PRODCOM code represent the sector of a product. ↩

6. This figure is calculated based on the previous FY Marginal Emissions Factor * sum of the ETS and CPS average over the previous FY. ↩

7. GDP deflators at market prices and money (GDP) December 2021, Quarterly national accounts. ↩

8. Communication from the Commission supplementing the Guidelines on certain State aid measures (2021/C 528/01) ↩

9. GVA is defined as earnings before interest, taxes, depreciation, and amortisation (EBITDA) plus staff costs (including employer’s pension and national insurance contributions) ↩

10. Detail of all the employees’ costs of the Company (including pension costs) ↩

11. Capital expenditures in the UK is the total sum of funds used to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment, within the United Kingdom. ↩

12. Total Capital expenditures split on new and existing assets is the split between the total sum of funds used to acquire physical assets such as property, plants, buildings, technology, or equipment and the total sum of funds used to maintain or upgrade existing physical assets such as property, equipment, building or technology, expressed as a percentage. ↩

13. The mean wage received per annum by workers in each installation listed by the company in their application. ↩

14. View subsidies awarded by UK government ↩