Government incentives for CHP schemes
Installing a 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 developing and operating CHP plants certified, either fully or partly, as “Good Quality” by the CHP Quality Assurance programme. The CHPQA is consistent with the EU definition of high-efficiency CHP/cogeneration.
Support so received is in addition to the commercial value of any heat and power generated. The following pages describe existing relevant government policies and measures that are supporting the greater deployment of Good Quality CHP. As a result of the devolution of powers within the UK to the Devolved Administrations in Scotland, Wales and Northern Ireland, there are some variations in treatment across the countries of the UK.
Climate Change Levy Exemption
The Climate Change Levy 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 CHPQA 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). Following closure of the CHP LEC scheme, March 2013 was the last month of generation eligible for CHP LECs.
For Further Information
Carbon Price Support Tax Exemption
In April 2013, a Carbon Price Floor was introduced on fossil fuels used to generate electricity. The CPF is made up of the EU ETS carbon price and a UK-only tax known as the Carbon Price Support. Supplies of coal, gas and LPG used in most forms of electricity generation are liable for the CPS tax. The CPS tax does not apply in Northern Ireland due to the common electricity market with the Republic of Ireland. Operators of CHP schemes above 2MWe were initially liable to account for the CPS rates of CCL on the proportion of coal, gas or LPG they used to generate electricity. However, with effect from the 1 April 2015, the Government introduced an exemption from the CPF for fuels that are used in CHPs to generate Good Quality electricity for self-supply or use ‘on site’.
- Electricity is used on-site if it is self-supplied or supplied to a consumer by an exempt unlicensed electricity supplier.
- Electricity is self-supplied where the producer makes no supply of it to another person, but causes it to be consumed in the UK. This will include the parasitic load of the CHP scheme.
- A CHP scheme can be exempt unlicensed electricity supplier if it qualifies under Class A or Class C of Schedule 4 of The Electricity (Class Exemptions from the Requirement for a License) Order 2001.
For further information
CHPQA Guidance Note 41 provides an overview on the use of CHPQA to Obtain Exemption from CCL and Relief from Fuel Duty.
See worked examples for calculating CPS exemption for CHPQA certified schemes.
Enhanced Capital Allowances
The Enhanced Capital Allowances scheme allows businesses to write-off 100% of their investment in those energy saving technologies that are listed in the Energy Technology Criteria List 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 Certificate of Energy Efficiency.
For further information
- How to claim Enhanced Capital Allowances for Good Quality CHP Schemes
- CHP section of the “ECA Energy Technology List 2014”
Be aware that:
- The main intended business of the CHP should be to provide heat and power for clearly identified users on site or to known third parties, and not to generate power for sale to or via unspecified third parties.
- ECAs will be available for all companies except for companies whose core business is electricity production, insofar as they use the CHP system to produce electricity to be sold to unknown end users.
Note 1: From April 2008, loss making companies have also been able to 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.
Note 2: 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.
Ending enhanced allowances for energy and water efficient plant and machinery - Budget 2018 Announcement
The updates to the ETL and WTL will come into effect on the date set by the statutory instrument. The schemes will both end with effect from 1 April 2020 for companies and 6 April 2020 for unincorporated businesses. Capital allowances: Ending enhanced allowances for energy and water efficient plant and machinery
Business Rating Exemption
The business 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 scheme 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 plants and machinery
The valuation for business 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 can be found on the website of the Valuation Office Agency or in their telephone directory.
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. In Northern Ireland the business rating exemption is restricted to micro-CHP on or attached to an existing building. Micro-CHP means a maximum electrical capacity of 50kWe and/or a maximum heat capacity of 45kW.
For further information
- CHPQA Guidance Note 43 which covers the use of CHPQA to Obtain Exemption from Business Rating of CHP Plant and Machinery.
Renewables Obligation (ROCs are Closed for new CHP Schemes)
The Renewables Obligation was introduced to support electricity generation from renewable sources. The RO came into effect in 2002 in England and Wales, and Scotland, followed by Northern Ireland in 2005. 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. 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 were:
- 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 CHP schemes that are fully or partly certified as Good Quality under the CHPQA scheme, the power output eligible for the award of ROCs is determined by Ofgem using the relationship: Eligible Power Output = Net Power Output X Biomass Content (%) X Qualifying Power Output/Total Power Output
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
The detailed rules for support levels under the RO are set out in the Renewables Obligation Orders. In general terms the level of support for renewable electricity generated by Good Quality CHP is (for stations accrediting under the RO before 1 April 2015):
- 2.0 ROCs/MWh for schemes fuelled wholly by biomass (includes the CHP 0.5 ROC uplift)
- 1.0 ROCs/MWh for schemes fuelled by waste
To qualify for these ROC allowances, an additional CHPQA Certificate (GN44’ROC Eligible’ Certificate) is required based on a separate assessment to that used to access other benefits available to Good Quality CHP. See CHPQA GN44 (issue 4) for more details.
The Good Quality CHP uplift is grandfathered for all CHP stations accredited prior to 1 April 2013 which have at any time claimed the Good Quality CHP uplift.
A transition period ran between 1 April 2013 and 31 March 2015 where developers of new accreditations and new additional capacity had a one off choice between the GQCHP uplift or Renewable Heat Incentive support. All new CHP stations accredited during the transition period that chose the Good Quality CHP uplift are also grandfathered.
Where a CHPQA GN44 ‘ROC eligible’ certificate has been issued (thus able to claim the CHP ‘ROC Uplift’), participants are ineligible to claim support on the heat output under the RHI.
CHP accredited (or adding additional capacity) by or after 1 April 2015 are only able to claim the Good Quality CHP uplift where the heat produced is from a technology and/or fuel source which has never met the RHI eligibility criteria. Thus all new/upgraded solid biomass CHP accredited from this date onwards will instead receive support from a combination of the RO (but no ‘Good Quality CHP uplift’) and RHI. However, as RHI support is not available to bioliquid CHP schemes, these schemes, if certified as Good Quality CHP by CHPQA, would receive 1.9 or 1.8 ROCs/MWh if accredited in 2015/16 and 2016/17 respectively. This is a ‘ROC Uplift’ of 0.4MWh over that received by dedicated biomass schemes without CHP.
The Northern Ireland Renewables Obligation works in conjunction and is consistent with the ROs in GB. The 2015 banding review to link RO and RHI was replicated in Northern Ireland but didn’t come in until October 2015.
For further information
Renewable Heat Incentive
The Renewable Heat Incentive (RHI), launched in November 2011, is UK Government 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. The RHI supports heat where that heat is used in a building for ‘eligible purposes’: heating a space, heating water, or for carrying out a process where the heat is used. Heat utilised to produce or process the renewable fuel, or used for electricity generation, does not qualify for RHI.
Qualifying useful heat must be measured by correctly installed heat metering equipment. Solid biomass CHP installations (excluding solid biomass contained in waste) are eligible for the solid biomass CHP tariff on their eligible heat output if:
- the installation/relevant combustion unit(s)/conversion from power only generation was commissioned on or after 4 December 2013.
- the relevant combustion unit(s) are new at the time of installation
- the installation is certified under the CHPQA scheme. Applicants will have to provide evidence of current CHPQA certification as part of the accreditation process in order to be awarded this tariff
- the relevant combustion unit(s) are designed and installed to burn solid biomass only (not including solid biomass contained in waste)
- the relevant combustion unit(s) comply with the air quality requirements Thus to qualify for the RHI tariff, the scheme has to have a CHPQA certificate but does not have to fully qualify as Good Quality CHP. However, the CHP tariff will be eligible only for heat generated by the engine or extracted from the turbine, and Ofgem will require that heat so generated is separately metered.
Accredited, participants in receipt of the solid biomass CHP tariff have to continue to be CHPQA certified each year in order to retain the solid biomass CHP tariff. Where Ofgem establish an installation is not certified under the CHPQA for any year, they will be assigned the relevant solid biomass (non-CHP) tariff for the period of non-certification. The rate at which RHI is paid to other renewable CHP plants eligible for support is dependent on their thermal output capacity and fuel type.
For Further Information:
Northern Ireland has its own Renewable Heat Incentive, both domestic and non-domestic, and makes its own regulations for the schemes and sets its own tariffs and technologies. Changes have recently been introduced to the Northern Ireland RHI and include two new tariffs for CHP to coincide with the changes in the NIRO.
Contracts for Difference
The Contracts for Difference regulations came into force in Great Britain on 1 August 2014; CfDs will replace the RO for new projects targeting commissioning from 1 April 2017 (RO grace periods allow certain slippage to commissioning beyond 31st March 2017). A final decision has still to be taken by Northern Ireland as to its inclusion in the CfD mechanism. CfDs are awarded competitively to the best value projects via an allocation round process.
A generator party to a CfD is paid the difference between the ‘strike price’ (a price for electricity reflecting the cost of investing in a particular low carbon technology), and the ‘reference price’ (a measure of the average market price for electricity). In the event that the reference price exceeds the strike price the generator pays the difference to the Low Carbon Contracts Company, a Government-owned but arms-length company.
Biomass CHP and energy from waste (but not bio liquid fuelled) CHP are eligible to compete for support in CfD allocation rounds, but biomass and energy from waste power-only projects are not eligible for CfD support. Support under the CfD will be paid only on the proportion of metered electrical output assessed by CHPQA scheme to be “Good Quality”.
Energy from waste CHP (EfW CHP) schemes are ineligible to apply for CfDs if they have also applied for support under the RHI, as the CFD strike prices for EfW CHP are based on both the power and heat component supplied (unlike those for biomass CHP schemes that are based on ‘power only’).
To be eligible for CHP specific CfDs, the operator will need to provide a CHPQA GN44 certificate, confirming that the scheme either partially or fully qualifies as Good Quality under the CHPQA criteria.
Support under the CfD will be paid only on the proportion of metered electrical output assessed by CHPQA to be Qualifying Power Output. This is applied in the CfD contract by applying a CHP Qualifying Multiplier (in normal circumstances the Qualifying Power Output / Total Power Output ratio) to the total electrical output of the plant.
For CfD purposes, the validity of the CHPQA GN44 certificate will continue on, and not cease on its expiry date, until such time as a new GN44 certificate is obtained - but the continued validity of a GN44 certificate after its expiry date will apply only in respect of electricity generated during periods when the reference price is above the strike price and the term of the CfD has not expired.
For Further Information
- See following CHPQA Guidance Notes for more details. Whilst policy responsibility for the CfD policy lies with BEIS, a CfD is a private law contract between the generator and the Low Carbon Contracts Company, a Government-owned company.
|GUIDANCE NOTE 44 Issue 5||Use Of CHPQA To Qualify For Contracts For Difference Support - for Renewable Obligation Schemes certified prior to 1 January 2016, that were not operational before 26 July 2012 and for Contracts for Difference contracts entered into before the publication of Issue 6 of this Guidance Note|
|GUIDANCE NOTE 44 Issue 6||Use of CHPQA in respect of the Renewables Obligation and Contracts for Difference - for Renewable Obligation Schemes not certified prior to 1 January 2016 and Contracts for Difference contracts entered into after the publication of this Guidance Note|
|GUIDANCE NOTE 44 Issue 7||Use of CHPQA in respect of the Renewables Obligation and Contracts for Difference - for Renewable Obligation Schemes not certified prior to 1 January 2016 and Contracts for Difference contracts entered into after the publication of this Guidance Note|
- Detail on how CfDs are administered, refer to the Electricity Market Reform (EMR) Implementation Response
The Feed-in Tariff (FiT) was introduced by the UK Government in order to support renewable electricity generating technologies installed up to 5 MWe in capacity.
On 18 December 2018 legislation was laid before government which closes the FIT scheme to new applicants from 1 April 2019, barring some exceptions. See Government Guidance on closure of this scheme: https://www.ofgem.gov.uk/publications-and-updates/draft-feed-tariffs-essential-guide-closure-scheme
The only renewable fuel CHP technology that was supported by the FiT scheme was anaerobic digestion (excluding sewage gas). Solid biomass, sewage gas and landfill gas CHP were 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 RO-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.
The Feed-in Tariff does not apply in Northern Ireland and there is no alternative policy in place.
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).
- From 1 April 2013, CHP schemes in Great Britain have had to account for CPS rates of fuel duty on oil that is referable to the production of electricity. This is applied as a reduction in relief claimed on oil and bio-blend used in electricity generation. If no relief is on oil and bio-blend used in electricity generation, no requirement to account for the CPS rates of fuel duty.
- HMRC Excise Notice CCL1/6 which provides a guide to carbon price floor