Warning over green tax break

By Ed Crooks, Energy Editor
Published: March 26 2009 01:48

The end of a tax break for combined heat and power plants threatens tens of thousands of jobs in an environmentally friendly industry, businesses will warn the government on Thursday.
Industry executives will meet Treasury officials to urge the chancellor to extend support for CHP, worth £500m ($728m) a year, in next month’s Budget.

The government has so far refused to give a clear indication of its position. The industry says that flies in the face of the claim by Gordon Brown, the prime minister, to be creating “green jobs” to offset the economic downturn.
Greenpeace, the environmental campaign group, argued last year that the output of electricity from CHP could quadruple to meet about a quarter of Britain’s demand for power.
However, the industry argues that without sustained support new projects will not be developed and existing projects will shut.
CHP plants have since 2002 been subsidised by an exemption from the climate change levy: the tax on industry’s energy use, charged at a rate of about 0.46p per kilowatt hour of electricity, which is roughly 10 per cent of today’s price.
Powerful energy source at home
Combined heat and power (CHP) plants are power stations that use the heat they create. In some countries, such as Denmark and the Netherlands, the heat is used in homes, but in Britain it is typically used for industrial processes, such as oil refining. CHP provides about 7 per cent of the UK’s electricity capacity and about 80 per cent of it is on manufacturing sites.
CHP plants typically cost about 20 per cent more than equivalent conventional plants, but cut greenhouse gas emissions by up to 20 per cent. Small-scale CHP boilers for the home are likely to generate electricity as well as providing hot water and central heating.
However, the government agreed with the European Commission a 2012 deadline for the CCL exemption under the state aid rules. After that, the exemption is supposed to end. The government can apply to extend it, but has not yet indicated whether it plans to do so.
Investment in new CHP projects has been drying up because companies cannot be sure of the future tax treatment of their projects. Electricity generation from CHP, which rose sharply immediately after the tax break was introduced, has remained unchanged for the past four years.
Phil Piddington, of RWE Npower, Britain’s biggest generator of power from CHP, said: “There is an urgent need for clarity over the longevity of climate change levy exemption for good quality CHP if new and sustainable investment is to flow into new combined heat and power projects in the UK.”
Uncertainty over the tax system could also discourage replacement of ageing equipment in existing CHP plants, forcing them to shut. That means capacity could fall “considerably” over the next five years, the industry has warned.
The Combined Heat and Power Association calculates that 140,000 jobs are supported by the industry, including 5,000 that work in CHP plants and 116,000 on industrial sites served by the plants that could be forced to close if their heat source were shut down.
Copyright The Financial Times Limited 2009