The Elephant in the Room is Getting Bigger

2EA - CCL, The Elephant in the Room

In less than a month, one of the UK’s biggest energy taxes is set to increase by around 51% compared to 2018/2019 rates.

Tax on gas will increase by 3.9% for 2020/2021, and a further 3% in 2021/2022 while electricity tax rates will slowly decrease to fall in line with the rate for gas.

The tax being discussed here, but overlooked everywhere else, is Climate Change Levy (CCL).

Why is this tax overlooked?

To date, there has been little discussion about CCL; where it is from, how it works and how to mitigate the costs etc. This may be because some people find the concept of managing such a tax either impossible or unachievable. However, with the right support, CCL can be easily managed. The upcoming rate increase has the potential to add tens of thousands of pounds to non-domestic bills. Therefore, now more than ever, it is crucial to understand CCL and how it can be reduced.

This article looks at the background of CCL, the revenue it generates for the government, the history of rates to date, a full cost analysis covering seven key sectors for the period 2018 to 2022 and a breakdown of how to mitigate CCL costs to your organisation.

CCL affects all businesses. Exemptions only apply to businesses with low energy use and most charities/non-profit organisations.

Background

CCL is an energy tax that was introduced in 2001 through the finance act. It was solely aimed at non-domestic energy users and has since remained that way. Its scope was to encourage energy efficiency and reduce energy use where possible.

CCL is calculated based on the amount of energy being supplied and is charged by the supplier of the taxable commodity. Suppliers then pay the collected tax to HM Revenue and Customs. It is charged at a flat rate on every kilowatt-hour (kWh) of energy used.

Since its implementation, it has since grown in revenue year on year. According to statista.com, in 2017, CCL brought in £1.8bn to the UK government. With the upcoming rate increase to balance out other energy taxes being abolished, this is set to rise for the foreseeable future.

The rates

Since 2005, the rates of CCL have increased based on average RPI. Each year the increase in rates is announced through the chancellor’s budget.

Outlined are CCL rates dating back to 2013/2014. Each rate takes effect from the beginning of the financial year, April 1st.

Commodity 2013/2014 2014/2015 2015/2016 2016/2017 2017/2018
Electricity (£/kWh) £0.00524 £0.00541 £0.00554 £0.00599 £0.00568
Gas (£/kWh) £0.00182 £0.00188 £0.00193 £0.00195 £0.00198
LPG (£/kWh) £0.01172 £0.01210 £0.01240 £0.01251 £0.01272

From 2020 the rate for electricity will decrease, while the gas rate will continue to increase. This is so within these years the gas rate reaches 60% of the electricity rate by 2021/2022.

Commodity 2018/2019 2019/2020 2020/2021 2021/2022
Electricity (£/kWh) £0.00583 £0.00847 £0.00811 £0.00775
Gas (£/kWh) £0.00203 £0.00339 £0.00406 £0.00465
LPG (£/kWh) £0.01304 £0.02175 £0.02175 £0.2175

We can see for the 2019/2020 rates; there is a significant increase. This is because the Carbon Reduction Commitment is being scrapped in October 2019.

If you are a participant in CRC and you pay CCL, then this year (2019) will be a 'double whammy' of both CCL and CRC, as you will be paying the new CCL rate and the final CRC cost in 2019.

A study of future costs

CCL applies to a cross-sector of organisations, with exemptions only in place for low energy use and most charities and non-profits.

This study looks at seven key sectors within the UK; Hotels, Supermarkets, Leisure Centres, Hospitals, Office Blocks, Schools & GP Surgeries. We have taken actual consumption figures from these sectors and applied CCL to each one to identify and understand the upcoming cost to organisations.

It should be noted some schools, GP practices and some other businesses may not pay CCL due to low energy use. However, there are many schools and GP surgeries that do pay CCL.

Where can you find your CCL cost?

CCL is often shown as a separate line item on energy bills (usually above the VAT line) and is also VAT applicable.

It must also be noted that energy prices and energy consumption of buildings may increase or decrease in the period outlined and the calculations may not fully represent the sectors shown.

CCL Rates for 2018/2019 are already in effect. However, these rates will increase significantly next year. Each calculation of ‘CCL Payable’ is based on per site. For example, if you have six leisure centres, based on the below consumption, you’d pay CCL on all six sites.

Sector Annual Consumption (kWh) CCL Rates - 2018/2019 CCL Payable - 2018/2019  
Electricity Natural Gas Electricity Natural Gas Electricity Natural Gas Total CCL Payable
Hotels 2,704,105 8,662,142 £0.00583 £0.00203 £15,764.93 £17,584.15 £33,349.08
Supermarkets 3,791,180 947,795 £0.00583 £0.00203 £22,102.58 £1,924.02 £24,026.60
Leisure Centres 919,970 1,683,655 £0.00583 £0.00203 £5,363.43 £3,417.82 £8,781.24
Hospitals 11,595,555 7,020,269 £0.00583 £0.00203 £67,602.09 £14,251.15 £81,853.23
Office Blocks 396,715 476,537 £0.00583 £0.00203 £2,312.85 £967.37 £3,280.22
Schools 222,129 542,604 £0.00583 £0.00203 £1,295.01 £1,101.49 £2,396.50
GP Practices 55,969 53,751 £0.00583 £0.00203 £326.30 £109.11 £435.41

We can see how significant the rate increase is on the costs of CCL to these 7 sectors. The following included are the years; 2019/2020, 2020/21 and 2021/2022.

Sector Annual Consumption (kWh) CCL Rates - 2019/2020 CCL Payable - 2019/2020  
Electricity Natural Gas Electricity Natural Gas Electricity Natural Gas Total CCL Payable
Hotels 2,704,105 8,662,142 £0.00847 £0.00339 £22,903.77 £29,364.66 £52,268.43
Supermarkets 3,791,180 947,795 £0.00847 £0.00339 £32,111.29 £3,213.03 £35,324.32
Leisure Centres 919,970 1,683,655 £0.00847 £0.00339 £7,792.15 £5,707.59 £13,499.74
Hospitals 11,595,555 7,020,269 £0.00847 £0.00339 £98,214.35 £23,798.71 £122,013.06
Office Blocks 396,715 476,537 £0.00847 £0.00339 £3,360.18 £1,615.46 £4,975.64
Schools 222,129 542,604 £0.00847 £0.00339 £1,881.43 £1,839.43 £3,720.86
GP Practices 55,969 53,751 £0.00847 £0.00339 £474.06 £182.22 £656.28
Sector Annual Consumption (kWh) CCL Rates - 2020/2021 CCL Payable - 2020/2021  
Electricity Natural Gas Electricity Natural Gas Electricity Natural Gas Total CCL Payable
Hotels 2,704,105 8,662,142 £0.00811 £0.00406 £21,930.29 £35,168.30 £57,098.59
Supermarkets 3,791,180 947,795 £0.00811 £0.00406 £30,746.47 £3,848.05 £34,594.52
Leisure Centres 919,970 1,683,655 £0.00811 £0.00406 £7,460.96 £6,835.64 £14,296.60
Hospitals 11,595,555 7,020,269 £0.00811 £0.00406 £94,039.95 £28,502.29 £122,542.24
Office Blocks 396,715 476,537 £0.00811 £0.00406 £3,217.36 £1,934.74 £5,152.10
Schools 222,129 542,604 £0.00811 £0.00406 £1,801.47 £2,202.97 £4,004.44
GP Practices 55,969 53,751 £0.00811 £0.00406 £453.91 £218.23 £672.14
Sector Annual Consumption (kWh) CCL Rates - 2021/2022 CCL Payable - 2021/2022  
Electricity Natural Gas Electricity Natural Gas Electricity Natural Gas Total CCL Payable
Hotels 2,704,105 8,662,142 £0.00775 £0.00465 £20,956.81 £40,278.96 £61,235.77
Supermarkets 3,791,180 947,795 £0.00775 £0.00465 £29,381.65 £4,407.25 £33,788.89
Leisure Centres 919,970 1,683,655 £0.00775 £0.00465 £7,129.77 £7,829.00 £14,958.76
Hospitals 11,595,555 7,020,269 £0.00775 £0.00465 £89,865.55 £32,644.25 £122,509.80
Office Blocks 396,715 476,537 £0.00775 £0.00465 £3,074.54 £2,215.90 £5,290.44
Schools 222,129 542,604 £0.00775 £0.00465 £1,721.50 £2,523.11 £4,244.61
GP Practices 55,969 53,751 £0.00775 £0.00465 £433.76 £249.94 £683.70

Comparing year on year, we can see that come 2020/2021/2022 the cost of these rates starts to balance out and remains at a steady state. It is still a significant increase and extra cost to organisations.

Sector 2018/2019 2019/2020 2020/2021 2021/2022
Hotels £33,349.08 £52,268.43 £57,098.59 £61,235.77
Supermarkets £24,026.60 £35,324.32 £34,594.52 £33,788.89
Leisure Centres £8,781.24 £13,499.74 £14,296.60 £14,958.76
Hospitals £81,853.23 £122,013.06 £122,542.24 £122,509.80
Office Blocks £3,280.22 £4,975.64 £5,152.10 £5,290.44
Schools £2,396.50 £3,720.86 £4,004.44 £4,244.61
GP Practices £435.41 £656.28 £672.14 £683.70

Exemptions and Mitigation

There are several exemptions and relief schemes. The most common are; on-site self-generation which can be achieved through the installation of a CHP unit and registering it successfully with the governments’ CHPQA Programme; and through Climate Change Agreements (CCAs).

CHPs, CHPQA and the submission process

The CHP Quality Assurance programme was introduced at the same time as CCL in 2001 and, like most government programmes, it has developed tighter rules to ensure the programme works to its best abilities.

The CHPQA Programme is a government initiative that aims to provide a methodology for assessing all types and sizes of Combined Heat & Power (CHP) schemes throughout the UK. Participation in the scheme is voluntary. However, successful CHPQA certification grants eligibility to a range of benefits including; Renewable Obligation Certificates, Renewable Heat Incentive, Enhanced Capital Allowances and preferential Business Rates. Those operating CHP units could (and still can) obtain an exemption from CCL on the gas used by the CHP scheme by registering with the CHPQA programme.

However, HMRC mandated the requirement that annual reconciliation should be carried out. This entails determining the CCL paid in the previous year and retrospectively applying an actual exemption based upon an issued CHPQA certificate.

To find out more on annual reconciliation and the CHPQA submission, download our CCL Paper.

Climate Change Agreements (CCAs)

A CCA is a voluntary contractual agreement between an organisation and the Environment Agency (EA). The organisation, usually an industrial company, agrees to report energy use against a target to the EA.

CCAs are a UK Government initiative with the objective of reducing industrial energy use and CO2 emissions. For those organisations involved at the time, the first reporting period was in 2002. In its current form, CCAs are to continue operating until 31st March 2023.

Legislation within the Finance Act 2000 made provision for a reduced rate of the levy for energy-intensive industries that have entered into a negotiated energy efficiency Climate Change Agreement (CCA).

If neither of these are viable options for your organisation, it is recommended that you undertake energy audits of your sites to help identify energy-saving measures that can reduce your energy use and in turn reduce your CCL liability.

Summary

CCL is a tax that is set to stay for the foreseeable future and energy is taking a more prominent position within an organisation’s running costs. Both can no longer be ignored by users of energy, energy consultants or industry media. It is crucial that more organisations are made aware of these costs and how to go about reducing them.

Businesses with CCAs or those operating CHP unit(s) can reduce liability further. For organisations starting on the road to reduce their CCL liability, if CCA’s are not a viable route, then the installation of a CHP should be considered as soon as possible. Further to this, energy audits to reduce energy costs need also be considered.

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