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But what are these energy taxes and incentives? How do they help to promote positive change in the energy sector? And what do they mean for you, the savvy energy consumer? Can they help you to improve your energy efficiency at home?
Last update: April 2022
There’s no doubt that the future of the UK energy market is in renewables. In fact, in 2020 the UK has achieved it’s greenest ever energy fuel mix with over 50% of our energy coming from renewable sources like wind, solar, hydropower and biomass. But in an energy industry that has been privatised for the past 30 years, what keeps energy companies investing in a renewable future? While social responsibility (and good old-fashioned PR) certainly play a part, the government also gives energy suppliers and consumers a nudge in the right direction with energy taxes and renewable energy incentives.
Join us as we take a close look at the energy taxes and renewable energy incentives that keep our energy industry motivated to go green and stay green.
Environmental taxes on energy
Like many governments around the world, the UK government aims for the country to be completely carbon neutral by 2050. There are two ways in which the government (through the energy industry regulator Ofgem) keep energy companies on the straight and narrow in terms of sustainability and renewability in order to meet that target. The first is by placing taxes on activities and operational practices that directly reduce to high carbon emissions and contribute towards climate change.
Let’s take a look at the environmental taxes on the energy industry and UK homes and businesses, to see how they help to propel us towards a carbon-neutral energy industry.
Climate Change Levy
The Climate Change Levy (CCL) is a tax imposed on non-domestic energy consumers (i.e. UK businesses) for the non-renewable energy that they use. Rates are applied to electricity and gas, although they are also applied to solid fuels like coal and lignite, too.
It is applied to most sectors including:
- Public services
However, non-commercial enterprises and those that use only a small amount of energy are exempt.
Historic main rates for the CCL are listed in the table below.
|Time period||Natural gas||Electricity|
|1 April 2016-31 March 2017||0.195p/kWh||0.559p/kWh|
|1st April 2017-31st March 2018||0.198p/kWh||0.568p/kWh|
|1st April 2018-31st March 2019||0.203p/kWh||0.583p/kWh|
|1st April 2019-31st March 2020||0.339p/kWh||0.847p/kWh|
|1st April 2020-31st March 2021||0.406p/kWh||0.811p/kWh|
This EU initiative is designed to reduce net carbon emissions in Europe by at least 55% in 2030, and to zero by 2050. This incentive works on the principle of ‘cap and trade’.
A cap is set on the total amount of certain greenhouse gases that installations are allowed to produce. Over time, this cap is incrementally reduced, making emissions fall sustainably.
When they’re covered by this cap, enterprises can receive or buy emission allowances, and trade them between themselves if necessary. It’s also possible to buy limited amounts of international credits from emission-saving projects outside the EU.
At the end of every year, companies must have enough allowances to cover all of their emissions, or risk facing a heavy fine. When companies reduce their emissions, they may keep the left-over allowances to cover future emissions. Alternatively, they can sell them to another company.
This incentivises businesses to invest in low-carbon technologies, yet is flexible enough to make the scheme easy for companies of all shapes and sizes to adopt.
As well as ensuring that they use energy renewably, businesses also need to consider the ecological impact of their waste. As such, there is a tax on all business waste that goes to landfill. Landfill Tax is applied to all non-recyclable waste on or after 1st October 1996 that is disposed of at a licensed landfill site. There are two rates for landfill tax. Waste that is inert or inactive is charged at the lower rate. You can see how the rates have changed in recent years in the table below.
|Rate from 1 April 2020||Rate from 1 April 2019||Rate from 1 April 2018|
Tax incentives for renewable energy
Of course, it’s not enough for the government and Ofgem to impose taxation on practices that deviate from our path to carbon neutrality. They also need to reward and reinforce innovative and carbon-neutral energy consumption and operational methods.
As such, there are a number of tax incentives that will likely prove instrumental in ensuring that the UK is completely carbon neutral within the next 30 years.
CRC Energy Efficiency Scheme
This government scheme is designed to encourage large businesses with exhaustive energy needs to become more energy efficient and reduce their carbon emissions. Previously known as the “Carbon Reduction Commitment”, this scheme extends to large energy users in both the private and public sector. This includes supermarkets, banks, local authorities, water companies and government departments.
Participating organisations are required to monitor their energy usage and report it to the government annually. The reporting system used by the Environment Agency’then applies emissions factors to calculate participants’ carbon dioxide (CO2) emissions based on the information provided.
As with the emissions trading scheme, participants but and surrender allowances. Allowances can be bought at “Forecast Sale Price” at the start of the year or a “Compliance Sale Price” towards the end of the year.
Prices over the past 5 years are as follows:
|CRC Scheme Year||Forecast Sale Price||Compliance Sale Price|
Carbon Price Floor
The Carbon Price Floor is another UK government initiative. This is designed to support and work in conjunction with the EU Emissions Trading System and the Climate Change Levy. It was introduced in 2013 to underpin the price of carbon in order to incentivise low-carbon investment among businesses.
There are two components to the price floor which energy generators pay for in different ways. Firstly there’s the Emissions Trading allowance price. Secondly, there’s the Carbon Support Price. This , which tops up the EU allowance prices, as projected by the Government, to make sure that they match the carbon floor price target. The cost of participating in this scheme is folded into the cost of energy bills.
EU Emissions Trading Scheme Exemption
Renewable energy generators are exempt from having to participate in this scheme. An incentive that will hopefully encourage more availability within the renewable energy market, making it easier and more cost-effective to offer renewable energy to UK consumers.
The domestic rate of VAT for energy is charged at 5%. A measure that helps to keep household energy costs manageable, and ensure a competitive market. However, most businesses pay a VAT rate of 20%. However, businesses with lower energy use may be eligible for VAT at a reduced rate of 5%. The same as the domestic rate. This may encourage small and microbusinesses to reduce their energy use in order to benefit from cheaper rates.
Green Homes Grant
It’s not just businesses that can benefit from improving energy efficiency and reducing their carbon footprint. Under the Green Homes Grant, households can get vouchers up to the value of £5,000 to offset the cost of energy-saving home improvements. These must include a primary improvement such as a biomass boiler, air / ground source heat pump, solar water heater or insulation. It can also encompass secondary home improvements like energy-efficient doors, draughtproofing, hot water tank insulation and double glazing (if you only have single-glazed windows at the time of applying).
The scheme is eligible to all owner-occupants and landlords in England. But hurry! The grant is only available until the end of March 2022.
Renewables Obligation Scheme
Renewables Obligation has played a key role in the availability of renewable energy on the UK market. Under Ofgem’s current rules, energy suppliers are obliged to ensure that part of the energy fuel mix that they offer comes from renewable sources. Failure to meet this obligation and obtain sufficient Renewables Obligation Certificates can result in hefty fines that have even seen some smaller suppliers go out of business.
Feed in Tariff
Feed in Tarriffs pay energy consumers with PV solar panels, domestic wind turbines and other means of domestic renewable energy generation for the electricity that they pump back into the national grid. While these are still in place, they are not available to new applicants as of March 2019.
They have, however, been replaced by the Smart Export Guarantee. A very similar scheme, albeit with slightly less favourable rates per kWh.
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Renewable Heat Incentive
Finally, the Renewable Heat Incentive is designed to offset the cost of domestic and non-domestic installations that produce renewable heat such as solar water heaters, ground / air source heat pumps and biomass boilers. This provides quarterly payments that can be used to make such installations more economically viable in the long term. This incentive can also be used in conjunction with the Green Homes Grant.
What does this mean for energy consumers?
So, what’s the net result of all these energy taxes and incentives for energy consumers? Essentially, it means that in the coming years it’s going to be easier and more financially rewarding than ever to consume renewable energy.
If you’re looking for the perfect green energy tariff for your needs, we can scour the market for deals that not only reduce your carbon footprint, but significantly drive down your household energy spend.
Want to know more? Call us today on 0330 818 6223. We’re available from 8.30 am to 5.30 pm.
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What is the VAT rate for energy?
Domestic energy is charged VAT at 5%. Commercial energy, however, is charged at the standard rate of 20%. However, smaller businesses and microbusinesses may be able to claim for reduced VAT on the energy they use if your energy usage is less than 145kWh of gas per day (4,397kWh per month) and 33kWh of electricity per day (1000 kWh per month).
Can I get a new boiler under the Green Homes Grant?
Unfortunately, most domestic boilers use natural gas, making them ineligible for the Green Homes Grant as gas is not renewable. However, if you intend to fit a biomass boiler this will be eligible for the grant.
Can I still get the Renewable Heat Incentive if I’ve applied for the Green Homes Grant?
Absolutely! The Renewable Heat Incentive can offset the cost o your contribution to the works carried out.
What’s the difference between Feed in Tariffs and the Smart Export Guarantee?
Unfortunately, Feed in Tariffs are no longer available to new applicants. Smart Export Guarantees (SEGs) work in the same way, although the rates are slightly lower than they were for Feed in Tariffs.
Energy suppliers currently pay between 1p and 5.5p per kWh of energy under the SEG. There are even some, such as Tesla / Octopus Energy, that pay as much as 8p-11p/kWh. However, this is under the condition that you use a specific storage battery in your setup.
Updated on 16 May, 2022
UK Content Manager