Consultation outcome

Government consultation response for British Industry Supercharger package for strategic Energy Intensive Industries (EIIs): Capacity Market exemption

Updated 5 September 2023

1. Introduction

1.1 Rationale for the consultation

On 23 February 2023, the government announced the British Industry Supercharger (BIS): a decisive set of measures to make Britain’s strategic Energy Intensive Industries (EIIs) more competitive across Europe and tackle the challenge of indirect carbon leakage.

The BIS is comprised of 3 measures which will together address the areas of the domestic energy system which currently contribute to higher electricity costs for EIIs than comparable countries.

The 3 measures are as follows:

• an increase in the subsidy under the existing EII Renewable Levy Exemption scheme from 85% to 100% aid intensity
• a new full exemption from the indirect costs associated with the GB Capacity Market.
• a proposed compensation scheme for the charges paid for using the GB electricity grid through the EII Network Charging Cost Compensation Scheme

This consultation addressed the first 2 of the 3 elements of the BIS package, and this document provides the government response and next steps for the measure to exempt EIIs from Capacity Market (CM) costs.

2. Summary of the consultation

The consultation was published on 18 May 2023 by the Department of Business and Trade (DBT) to seek views on exempting EIIs from all costs associated with the GB CM.

Through the consultation, DBT sought views and evidence from a wide range of audiences, including EIIs (whether currently benefiting from existing schemes or not), electricity suppliers, business representative organisations, trade bodies, capacity providers and other interested parties.

DBT sought views on:

• the design of the proposed scheme and whether the existing EII Renewable Levy Exemption Scheme is an appropriate model to base this on
• evidence of any potential unintended consequences to the running of the CM
• evidence of impact on suppliers, particularly on credit cover requirements
• stakeholders were provided with an opportunity to provide their views and evidence to the questions posed

This consultation was available on the GOV.UK website and was emailed directly to a number of stakeholders who had previously expressed an interest in this issue or could be perceived as an interested party.

The consultation ran for 6 weeks and closed on 29 June 2023. A total of 24 responses were received from stakeholders, including EII companies, business representative organisations, trade associations, energy suppliers, capacity providers and others. Overall, responses represented the views of over 2,000 organisations, when considering bodies who answered on behalf of multiple members.

This document provides a full government response after analysing all the responses. Responses captured in this document refer to “respondents”, whereby each individual response submitted has equal standing, regardless of whether this was received on behalf of a trade body or an individual company.

Following collation of evidence from the consultation and a sector assessment, we have concluded that there continues to be a risk of carbon leakage for EIIs due to higher costs incurred to support the running of the CM and other renewable energy policies within the UK.

There is a risk that the policy costs imposed on EIIs could lead to the displacement of production, and associated emissions that would not have happened if climate rules and policies across jurisdictions were implemented in the same way.

This government response sets out the proposed policy change to exempt EIIs who meet the eligibility criteria from all costs associated with the running of the GB CM.

3. Evidence from the consultation

Firms provided a mix of qualitative and quantitative evidence to suggest that production would likely shift overseas if electricity prices are not targeted in some way.

In summarising the responses received to each question, “most” or “many” indicates more than 70%, “the majority” indicates more than 50%, “some” indicates between 30% and 50% and “a few” represents less than 30% of respondents.

When considering the summaries of responses, please also note that this summary does not seek to exhaustively capture all views expressed, but to summarise key themes and particularly notable points of feedback within responses. Please also note that respondents used either an online response portal or sent their responses by email; and not all respondents answered every question.

The government engaged closely with directly concerned parties throughout the consultation period to explain and clarify the proposals and support respondents in developing their submissions. Views expressed during these events are not captured in this response, however, we have factored these into our decision making and next steps.

3.1 Energy efficiency measures

The consultation comments on energy efficiency and asks whether the BIS may lessen the incentive for businesses to invest in energy efficiency measures which would support the reduction in their energy bills and emissions in the longer term. Energy efficiency continues to be a key pillar of our Industrial Decarbonisation Strategy and Net Zero Strategy, so this is an important component to consider when deciding on providing subsidies to large energy users in particular.

Some respondents, particularly individual EIIs or trade bodies representing a number of EIIs, provided data commenting on energy efficiency and the impact of the proposed CM exemption, and the BIS package overall.

The case was made that while an exemption from CM charges would have the intended outcome of reducing electricity bills, this would only reduce the risk of a decrease in output in the form of demand destruction in the UK and a strong incentive remains to reduce demand and electricity usage to enable products produced to compete in internationally competitive markets. Therefore, the policy measures outlined would not make GB electricity costs cheaper than European counterparts but bring them more in line.

Some respondents who commented specifically on energy efficiency said that exposure to the wholesale market cost in the retail electricity price will continue to incentivise EIIs to increase energy efficiency further. Furthermore, regulatory incentives such as climate change agreements, streamlined energy and carbon reporting obligations were cited as continued incentives to increase energy efficiencies which far outweigh any potential dis-incentivisation that would come from the CM exemption.

3.2 Business level test

The consultation outlined the intention for the same eligibility criteria to be used for each of the measures in the BIS package as is currently used for the EII Renewable Levy Exemption Scheme. The eligibility which determines the cohort involves a sector level test and a business level test and a firm must satisfy both in order to receive a certificate of eligibility and apply for the subsidy to be applied for their electricity bills.

This methodology ensures that only electricity intensive sectors who are exposed to the pressures of international trade (and are thus deemed to be less able to pass on costs to their customers) are eligible to be considered for support, and within these sectors only those businesses whose electricity costs amount to 20% or more of their GVA go on to receive support. This is in line with the approach taken for similar measures by EU nations.

Some respondents commented that they consider the business level test as arbitrary or unfair, with a few saying that the test does not account for differences in business models within the same sector and efficiencies invested in by particular businesses.

The purpose of the business level test is to ensure that the support targets only those businesses where it is most needed. The government listens to these concerns and we intend to conduct a review of the analysis that underpins the eligibility criteria for the measures in 2026. The rationale for this review date is to ensure that the analysis is supported by stable, post-Covid 19 and post-EU Exit data to provide us with an up-to-date view of the market and allow us to target those sectors most at risk from carbon leakage with greater confidence.

The business level test ensures that electricity price support is targeted at those firms most at risk of carbon leakage. A firm is deemed at risk of carbon leakage if they are exposed to international trade and are energy intensive.

Targeting support to firms most at risk of carbon leakage is important as we must weigh up the benefits of lower electricity prices for EIIs against the energy affordability impacts of passing the cost of EII support onto non-eligible consumers. DBT analysis indicates that removing the business level test, while maintaining the same sector level test[1], would triple the cost of the Capacity Market exemption for non-eligible consumers – including households. When the cost of the Capacity Market exemption is considered alongside the other elements of the British Industry Supercharger, the cost of removing the business level test would be sizeable.

4. Proposed timeline for implementation

The consultation outlines that the timeline for the proposed CM exemption will follow the closing of the Energy Bill Discount Scheme (EBDS) in April 2024, however, the government did not specify a proposed implementation date for the exemption.

A few respondents suggested that these measures should be implemented to align with the start of the CM Delivery Year in October.

We intend to lay a Statutory Instrument in spring 2024 which will go live at the beginning of the CM Delivery Year in October 2024. Our proposed implementation timetable will enable the Electricity Settlements Company to revise calculations pertaining to the CM by summer 2024. This will be outlined in the regulations and will enable EIIs, suppliers and Electricity Settlements Company sufficient time to ensure certification, credit cover arrangements and payment schedules are in place for 1 October 2024 to align with the start of the CM Delivery Year.

The first 6 months of the exemption will require the Electricity Settlements Company to use projected cost data for the first 6 months of the exemption, followed by 6 months of actual data and adjustments from April-September 2025. This follows the normal charging cycle process for the CM. We will know the cohort of eligible EIIs by March 2024 for the commencement of the extension of the EII exemption scheme which uses the same eligibility criteria, so this data can be used for the CM exemption mechanism.

5. Government response to the consultation questions

The government response sets out our approach to delivering the key measures consulted on, stating the rationale and timeline for delivering continued support for EIIs to help them address carbon leakage and provide a pathway to decarbonisation and less dependence on high-cost electricity.

5.1 Consultation questions

1. Do you have any views on whether the proposed process will deliver on the intent of the policy?

2. Do you have views on creating a Capacity Market exemption which uses a similar structure as appropriate to the existing EII exemption scheme?

3. Are there aspects of the existing EII exemption scheme that you consider are not appropriate for the proposed Capacity Market exemption?

4. Do you perceive these proposals to cause any unintended consequences to the running of the Capacity Market?

5. Do you have views on the impact on supplier credit cover requirements and how these will change because of the policy?

5.2 Question 1: Do you have any views on whether the proposed process will deliver on the intent of the policy?

Consultation response

85% of respondents who answered this question directly agreed that the proposed process to exempt EIIs from CM costs would deliver on the intent of the policy. They agreed that the process outlined in the consultation would likely reduce EII electricity prices by c. £5/MWh from 2024 when the measure is fully implemented.

Many EIIs and trade bodies provided supporting evidence of the substantial benefit the proposed exemption will have on their sectors, including supporting future investment and avoiding the impact of carbon leakage. UK Steel provided analysis on European comparators, demonstrating that, since 2021, electricity is £30-£90/MWh more expensive for UK steelmakers than German and French equivalents. They also provided evidence to show that, to decarbonise, the sector will necessarily need to increase its electricity consumption, and uncompetitive electricity prices have prevented many firms from taking this step to electrify.

Hydrogen Energy Association also highlighted how the measures in the BIS would facilitate the development of electrolytic hydrogen production projects, which they commented is likely to play an important role in the delivery of industrial decarbonisation by making hydrogen more affordable.

Whilst they agreed that the proposed exemption process would deliver on the intent of the policy, Mineral Products Association commented that they believe support would ideally be funded via general taxation rather than redistribution across other non-eligible electricity users.

2 respondents were not supportive of the proposed policy, with Sembcorp Energy UK citing that the 100% exemption could lead to unintended consequences of providing a greater than £5MW/h subsidy to eligible EIIs. Their response details the increase in CM T-1 clearing prices over the last 3 years from 77p/kW/year in 2019 to £60/kW/year in 2022 to demonstrate that using historical data could lead to incorrect calculations. They requested a full Impact Assessment and fiscal analysis of the proposed policy, an ask which was repeated by a few other respondents.

Finally, Valero Energy Ltd used their answer to this question to communicate concerns that the business level test unfairly disadvantages businesses like theirs who have invested in cogeneration equipment to avoid transmission and climate-related expenses on off-site generated electricity.

Government response

The government welcomes the strong support for the proposed policy and the idea that it will deliver on the intent outlined in the consultation. We acknowledge the comment regarding how the scheme and overall BIS package will be funded and understand the concern that any increase in electricity bills may have. This is why the government is targeting critical EII sectors most at risk of relocating outside the UK, risking thousands of jobs in our advanced manufacturing sectors based outside the South-East.

We note the comments from respondents to this question and throughout for further evidence to be provided, including a full Impact Assessment and cost benefit analysis. All secondary legislation is subject to a full Impact Assessment, including a full economic assessment and policy rationale, which will be published alongside the laying of the Statutory Instrument. We expect this to be in spring 2024. In the consultation, we included an estimate that consumers would be paying, on average, £5/MWh in Capacity Market costs in 2025. This is a forward-looking estimate provided by the Department for Energy Security and Net Zero (DESNZ). Estimating future electricity prices is inherently uncertain, and the value of the Capacity Market Exemption to EIIs is expected to be different every year. The analysis included in the consultation document was a snapshot of the 2025 impacts.

The Capacity Market Cost estimate is made up of 2 components, the administration levy, and the costs. The administration levy, which is the smaller component, is held constant and is based on historic data. The short and intermediate term forward looking cost estimates come from the Office for Budgetary Responsibility (OBR) forecasts which are converted into a per MWh value by DESNZ analysts. The long-term forecast comes from the DESNZ Dynamic Dispatch Model (DDM). The 2025 estimate is based on the OBR forecast.

Further analysis and rationale behind the business level test can be found in the main body of the government response.

5.3 Question 2: Do you have views on creating a Capacity Market exemption which uses a similar structure as appropriate to the existing EII exemption scheme?

Consultation response

84% of respondents who answered this question directly conveyed broad support for the proposal to create a CM exemption which uses a similar structure to the existing EII exemption scheme. Responses were positive from a range of perspectives, including suppliers who would be responsible for passing on the savings, eligible EIIs and trade associations. Those in agreement expressed the opinion that the existing scheme works well in practice and the process is familiar to those who interact with it.

Positive views were expressed by a wide range of respondents, including EII trade associations and individual companies, energy generators, non-domestic electricity suppliers and a Hydrogen trade body.

One respondent commented that the scheme should be implemented from October onwards to align with the beginning of the CM Delivery Year, given the complicated nature of the CM cost calculations when compared to other Renewable Obligation schemes.

2 respondents were not supportive of the proposal to use a similar structure as the existing scheme. Both respondents answered this question with views around eligibility.

Sembcorp Energy UK was concerned that non-eligible EIIs who use on-site supply, either through a PWN or Behind the Meter (BtM) generation would not receive the benefits of the policy proposal. They argue that the CM exemption as conceived could weaken the case for private investment in bespoke supply and potentially damage growth of EIIs. They suggest a direct compensation mechanism such as the rebates on Carbon Price Support (CPS) would be more effective.

The second respondent who was not supportive, Valero Energy Ltd, again cited concerns regarding the business level test.

Government response

The government welcomes the supportive comments from a wide range of parties which broadly agreed that aligning the new CM exemption scheme with existing practices in the EII Renewable Obligation Exemption Scheme is the most straightforward approach and would require the least administrative burden for EIIs and suppliers who are already familiar with eligibility, certification, reporting and recalculations. We intend to publish full guidance once the policy is in place, building on existing guidance which is already available.

The proposed timeline is to lay secondary legislation in spring 2024 after the Energy Bill Discount Scheme (EBDS) has closed. We expect the Electricity Settlements Company to have the mechanism whereby bills are recalculated in place by summer 2024. This will be provided for in the regulations and will enable EIIs, suppliers and Electricity Settlements Company sufficient time to ensure certification, credit cover arrangements and payment schedules are in place for 1 October 2024 to align with the start of the CM Delivery Year. We understand the concerns raised by Sembcorp Energy UK regarding the potential damage to the growth of EIIs who choose to invest in bespoke supply solutions. However, given the overwhelming support for the measure as set out in the consultation, we view the existing EII exemption scheme as an appropriate model to base the new CM exemption scheme on.

As noted above, further analysis and rationale behind the business level test can be found in the main body of the government response.

5.4 Question 3: Are there aspects of the existing EII exemption scheme that you consider are not appropriate for the proposed Capacity Market exemption?

Consultation response

Most respondents who directly answered this question were supportive of the proposal to mirror the existing EII exemption scheme. As with the responses to the previous two questions, there were some mentions of the business-level test and one respondent mentioned the current difficulty with getting the EII exemption scheme applied to their bills.

Mineral Products Association raised that the proposed policy could result in differences between GB and NI electricity prices given the proposed scheme is designed to provide relief to firms in GB who contribute to the costs of the GB Capacity Market. They are concerned that this could create a competitiveness distortion between firms operating on a different system and welcomed a dialogue with DBT for how this could be addressed.

Sembcorp Energy Ltd were not supportive of the proposal, stating that the current scheme can be administratively burdensome for suppliers already, particularly given there is an additional categorisation of consumers as Energy and Trade Intensive Industries (ETIIs) resulting from the Energy Bill Discount Scheme (EBDS). They were of the view that another categorisation would increase complexity for consumers and suppliers which would come through as increases to both eligible and non-eligible consumers’ electricity bills.

Government response

The government welcomes the support from the majority of respondents who view the current EII exemption scheme to be an appropriate model to design the CM exemption scheme from. We recognise that there are differences between the Capacity Market charging and billing system which are not equivalent to the Contracts for Difference, Renewable Obligations or Feed-in Tariff schemes and a mechanism will be designed to specifically accommodate these differences. This is outlined in an earlier section regarding the proposed timeline.

As noted above, further analysis and rationale behind the business level test can be found in the main body of the government response.

We intend for this policy to have as little administrative burden as practicable, for all parties involved, including EIIs, electricity suppliers, Electricity Settlements Company and DBT. EIIs will apply to DBT for a certificate of exemption, mirroring the current exemption scheme, and we intend to adapt the current process so that eligibility will apply for exemptions from all schemes, with the same certificate to be used as proof of eligibility.

We appreciate responses to this question from EIIs and multiple suppliers who agree that there are no foreseen practical issues with running a CM exemption similarly to the existing scheme. As we will be dependent on suppliers passing on the savings, this is particularly welcome.

5.5 Question 4: Do you perceive these proposals to cause any unintended consequences to the running of the Capacity Market?

Consultation response

100% of respondents who answered this question were of the view that they did not see any immediate unintended consequences to the running of the Capacity Market. Many commented that given the process of forecasting demand would remain unchanged and the CM payments, auctions and supplier charge are all distinct and separate processes, implementation of an EII exemption should have little or no impact on the everyday running of the CM itself.

One respondent, while supportive, noted that as the cost of the CM increases and falls on a smaller section of businesses and consumers, there may be questions asked about its cost-effectiveness and wider success of the CM.

Government response

The government believes that, from the responses provided, the case is made that these proposals should not cause any unintended consequences to the running of the CM. We particularly welcome that responses have been received from a range of relevant parties, including capacity providers who participate in the CM. This confirms that our policy proposals should not impact the everyday running of the CM other than how it is paid for, via suppliers. Recognising the importance of ensuring security of supply, the government welcomes this positive feedback. 

5.6 Question 5: Do you have views on the impact on supplier credit cover requirements and how these will change as a result of the policy?

Consultation response

91% of respondents who answered this question said that the proposed exemption would have minimal or no impact on supplier credit cover requirements. These respondents included electricity producers, non-domestic energy suppliers who would be directly impacted, as well as trade associations representing EIIs, CM participants and non-participants.

One respondent commented that, while minimal, recalculations of credit cover requirements for suppliers would be prudent and these should be lodged with the Electricity Settlements Company. Their view was that recalculation is particularly important when considering the impact of suppliers entering or exiting the market, and if a recalculation is not undertaken when the policy comes into effect then there may be a risk of small inaccuracies which may accumulate over time as the market changes, which could in turn lead to inaccurate reflection of suppliers’ credit risk and potential detrimental credit cover requirements on suppliers.

Sembcorp Energy UK commented that suppliers face significant administration challenges currently and new reporting structures could cause suppliers to see EIIs as undesirable customers, potentially reducing competition for that sector and harming EIIs in the long run.

Government response

The government welcomes the positive response to this question and the confirmation from affected parties that the policy proposal should not have significant, if any, impact on their credit cover requirements.

6. Conclusion and next steps

The government has recently published the Consultation on the Network Charging Compensation Scheme which can be found here. This provides opportunity for interested parties to comment on the proposals for the final measure in the overall BIS package.

Following the conclusion of this consultation, the government intends to take forward the proposed measures to exempt EIIs from 100% of CM charges, based on existing eligibility criteria outlined in the consultation which will apply to the full package of measures.

The government intends to legislate with a Statutory Instrument in spring 2024 to enable changes to be made to calculations and for savings to start to materialise from the start of the CM Delivery Year in October 2024.

The Government will publish a full Impact Assessment including evidence, an economic assessment and policy rationale for each of the measures in the BIS, including the CM exemption. We expect this to be made public in spring 2024.

We continue to work across government departments to ensure that strategically important EIIs are considered in other policy development, and we will continue to explore alternative policy options to support the sector.

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[1] A sector is deemed eligible if it passes the required trade and electricity intensity thresholds. A full list of eligible sectors can be found in the EII Exemption Scheme guidance: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1153238/cfd-ro-fit-exemption-guidance.pdf