Notice

Excise Notice CCL1/2 — Combined heat and power schemes

Updated 13 November 2023

1. Introduction

1.1 Information about this notice

This notice explains the liability to the main rates of Climate Change Levy (CCL) of taxable commodities supplied:

• to a combined heat and power (CHP) station
• by a CHP station

For information about the liability to the carbon price support (CPS) rates of CCL for operators of CHP stations with a generating capacity of 2 MW or above, please refer to Notice CCL1/6 A guide to the carbon price floor.

1.2 Who should read this notice

This notice is for operators of CHP stations and electricity utilities.

Unless indicated to the contrary, where we say ‘you’ or ‘your’ in this notice we mean the CHP operator or electricity utility, as appropriate. Where we say ‘we’ ‘our’ or ‘us’ we mean HMRC.

2. CHP, the CHP Quality Assurance (CHPQA) and the CCL exemptions

2.1 A CHP station for CCL purposes

CHP integrates the production of usable heat and power in a single process.

CHP stations are energy efficient in operation providing very significant fuel savings, and therefore offer cost and efficiency savings over conventional forms of electricity generation and heat supply. Favourable treatment under the CCL legislation is given to a CHP station where it is:

• registered with the Department for Energy Security and Net Zero (DESNZ) CHPQA programme (read paragraph 2.2)
• certified annually under that programme
• covered by a valid CCL Exemption Certificate issued by the Secretary of State

In these circumstances the station is a CHP station for CCL purposes.

The CCL exemption certificate determines:

• how a CHP station is then treated for CCL purposes
• the extent to which both input fuels used by it and electricity generated by it may either:
  • not be liable to the main rates of CCL
  • be liable to a lower amount when compared with conventional electricity generators

2.2 The CHP Quality Assurance (CHPQA) programme

The CHPQA is a voluntary programme carried out on behalf of DESNZ in consultation with the devolved administrations. It provides the means to assess and monitor good quality CHP capacity. Under the programme, operators can apply for registration and certification of their schemes in accordance with established criteria for good quality CHP and, if accepted, qualify for a range of benefits. These benefits include the CCL exemptions.

Only a station assessed and fully certified under the CHPQA programme is eligible for favourable treatment under the CCL legislation. CHP operators not participating in the CHPQA will be treated as electricity generators or auto-generators, as appropriate (see Excise Notice CCL1/3: Climate Change Levy — reliefs and special treatments for taxable commodities).

Under the CHPQA programme, CHP stations are assessed against methodologies set out in the CHPQA Standard — the Quality Index (QI), and the Power Efficiency (PE). Both can be determined from the fuel used, power generated and heat supplied. This information will be used to determine whether a CHP station qualifies for CCL exemption on its entire energy inputs and outputs.

Read more information about the Combined Heat and Power Quality Assurance Programme.

2.3 Exemptions from the main rates of CCL

Both input fuels used by a CHP and the electricity generated by it are eligible for exemption if the relevant conditions are met:

• the exemption for taxable commodities (such as coal and gas) used by a CHP station is dealt with in section 3, ‘Supplies of taxable commodities to CHP stations’
• the exemption for qualifying electricity produced by a CHP is dealt with in section 4 ‘Exemption for CHP produced electricity’

Section 5 ‘CHP electricity that is all either directly or self-supplied’ deals with how to work out how much electricity qualifies for exemption. There are 2 potential routes for that electricity:

• direct supplies between the CHP operator and customer where no third party takes ownership of the electricity
• self-supplies, where producers use the electricity themselves

2.4 Registering for CCL

If you make taxable supplies (including taxable self-supplies) you must notify us accordingly and register for CCL. Unlike VAT there is no registration threshold. If you qualify for exemption from the main rates of CCL on your entire energy inputs and outputs you don’t need to register with us (unless you’re liable to account for the carbon price support (CPS) rates of CCL). However, if you qualify only on some of your outputs, you’ll need to register with us for the levy where you’re making taxable supplies.

Find out how to register for Climate Change Levy.

3. Supplies of taxable commodities to CHP stations

3.1 Entitlement to CCL exemption from the main rates of CCL where the CHPQA threshold is met

All supplies of taxable commodities for use in producing outputs from a CHP are exempt from the main rates of CCL where a station achieves the CHPQA Standard threshold efficiency percentage, which is set at 20%.

‘Outputs’ includes heat, steam, air, water that has been heated or cooled and electricity (including the electrical equivalent of any qualifying mechanical power).

3.2 Entitlement to CCL exemption from the main rates of CCL where the CHPQA threshold is not met

Some CHP stations may not meet the threshold efficiency percentage under the CHPQA Standard. For such stations the input fuel qualifying for exemption from the main rates of CCL is scaled back in recognition of the reduced environmental benefits. Exemption is only provided for the ‘relevant fraction’ of the supply — known as the qualifying fuel input (QFI). Taxable commodities supplied as input fuel and above the QFI are liable to the main rates of CCL.

In determining the extent of CCL relief on input fuel, the relevant fraction is:

Efficiency percentage for the CHP station (× %) Threshold efficiency percentage (20%)

Where, for example, a station has an efficiency percentage of 15%, 75% CCL relief can be claimed on the input fuel used.

3.3 Declaring entitlement to the exemption

You should use the PP11 supplier certificate during a period of Annual Operation to make provisional declarations of your entitlement to exemption from the main rates of CCL on supplies of input fuels received. (Read Notice CCL1/3: Climate Change Levy — reliefs and special treatments for taxable commodities for guidance on the use of the PP11 supplier certificate).

In making your provisional declaration, you may also choose to use the efficiency percentage as shown on your current CHPQA certificate to determine the QFI to Total Fuel Input (TFI) ratio.

3.4 Reviewing entitlement to the exemption

3.4.1 Reconciliation

The CHPQA programme documentation accurately reflects the CHP station’s performance during the previous year. On receipt of a new CHPQA certificate, and following its submission to DESNZ for Secretary of State Certificate purposes, you must both:

• conduct a review of your PP11 supplier certificate
• reconcile the amount of CCL relief claimed on taxable commodities used as fuel inputs, against the actual performance of the station over the same period

3.4.2 Under or over-payments of CCL

When a review identifies a mismatch between the actual relief entitlement and the amount of relief claimed in a review period, you must take one of the following actions.

Where you’ve claimed too much relief and therefore underpaid the main rates of CCL

You must declare and pay the underpaid CCL to us. If you’re registered for CCL, you must account for the tax on your next CCL return. If you’re not registered for CCL, you must notify us of your liability to register and account for the tax on the CCL return we issue to you.

Where a liability to register occurs solely through the reconciliation of relief claimed on taxable commodities used as CHP input fuel, we may exempt you from registration under certain conditions.

Where you’ve claimed too little relief and therefore overpaid the main rates of CCL

Where you’re registered, you should offset the CCL credit against the CCL due on your return. Where you’re not registered, you should make a claim for tax credits.

Where the relief entitlement claimed matches actual entitlement

No action is required and the PP11 supplier certificate remains in force for a further year (subject to a maximum period of validity of 5 years).

3.4.3 Claiming a CCL credit

All claims for credit of CCL should be made on the CCL200X tax credit claim form.

Submit this together with supporting documents including a copy of both:

• your supplier certificate and supporting analysis
• your review calculations

Send these to:

HM Revenue and Customs  

Excise Processing Teams  

BX9 1GL  

United Kingdom

We expect to authorise repayment of an acceptable claim within a reasonable period — normally 30 days from the date the claim for tax credit is received. However, if we have to make enquiries about your claim or correct errors, we may need to extend the 30-day period.

4. Exemption for CHP produced electricity

4.1 Working out how much electricity qualifies

For the entire energy outputs of a CHP station to qualify for exemption from the main rates of CCL the station must achieve the relevant CHPQA Quality Index (QI) threshold under the CHPQA Standard.

If a CHP station fails to achieve the QI threshold the electricity produced that qualifies for CCL exemption is scaled back.

Relief from the main rates of CCL is based on the level of qualifying electricity produced in a CHP station. It is limited to the fraction of qualifying power output (QPO) divided by the total power output (TPO) taken from the current CHPQA certificate for a station. Sections 5 and 6 of this notice explain how this works in practice.

For electricity produced on or after 1 April 2013 operators of partly exempt stations must make two adjustments when calculating the point at which the QPO limit for the Annual Operation had been reached.

They should:

• disregard supplies to a utility or for domestic or charity use
• but include the electrical equivalent of any mechanical power produced

The status of the electricity output produced in the current year of operation is initially provisional, based on the current CHPQA certificate held.

4.2 Supplies of Qualifying Power Output (QPO) electricity

Direct and self-supplies of QPO electricity are always exempt from the mains rates of CCL.

Direct supply

This is a supply made under a contract involving only the CHP operator and the customer, with no intermediary taking ownership of the electricity. Direct supplies include those made through the distribution system of a licensed electricity supplier, provided that supplier does not take ownership of the electricity.

Self-supply

A self-supply occurs where the producer of electricity, having produced it from other taxable commodities, makes no supply of that electricity to another person but uses electricity itself.

For more information on direct and self-supplies, read section 5.

Supplies of electricity from a partly exempt CHP where its QPO limit has been exceeded are liable to CCL (subject to any other relief entitlement) and registration for the levy is required.

4.3 CHP produced electricity supplied by a third party

Electricity produced by a CHP station which is supplied indirectly (such as through a third party), is liable to CCL, subject to any other relief entitlement. This applies regardless of whether the electricity is QPO or not.

5. CHP electricity that is all either directly or self-supplied

5.1 Determining the extent of CCL exemption

5.1.1 Use of CHPQA certificates

The CHPQA certificate confirms a CHP station’s performance achieved in the previous calendar year. The actual performance of the station will not be known until a self-assessment is carried out and the related CHPQA certificate is received in the following year. Therefore, the status of the electricity output produced in the current year of operation is initially provisional, based on the current CHPQA certificate held.

Once a new CHPQA certificate has been received and the actual performance for the year is known, you may need to make one of the following adjustments to take account of any fluctuation in performance that has affected the QPO. The performance certified on the CHPQA certificate must be applied against the year to which the data relates.

5.1.2 CCL adjustments relative to the QPO produced

No change in the station’s performance

No further action is required where either:

• the QPO equals the total power output (TPO), so the station is fully exempt under the CHPQA programme
• the proportion of QPO compared with TPO is unchanged for a partly exempt station

Decrease in performance

Where the QPO certified for a fully exempt station becomes less than the TPO (so the station becomes partly exempt under the CHPQA programme), or the QPO element of a partly exempt station decreases further compared with the previous year’s certificate, the difference represents a taxable supply of electricity. You’ll be liable to register for the main rates of CCL (if you’re not already registered) and must account for the main rate of CCL due on that taxable supply of electricity on your CCL return.

Increase in performance

Where the QPO certified is less than the TPO (that is, the station is partly exempt under the CHPQA programme), but the QPO limit has increased compared with the previous year’s certificate, you should:

• calculate the CCL credit due and offset it against the CCL (main rate or CPS rate) due on your return (where you’ve a liability to register for CCL)
• submit a CCL200X tax credit claim form (where no registration is required)

6. Glossary

Term	Description
Annual Operation (AO)	A period commencing on 1 January and finishing on 31 December (see CHPQA).
Auto-generator	A person who produces electricity if the electricity they produce is primarily for their own consumption. Primarily for a person’s own consumption means: (a) it must not be produced by an electricity utility or by a person treated as such for the purposes of any supplies of electricity they make; (b) it must not be produced by a person who has consumed, in the preceding 3 months, less than 75 per cent of the electricity produced by them in that period.
CCL Combined Heat and Power Exemption Certificate	A full exemption certificate or a part exemption certificate given by the Secretary of State (Department of Energy and Climate Change) under the provisions of Finance Act 2000, Schedule 6 paragraph 148(2) or paragraph 148(3).
CCL or Climate Change Levy (main rate)	A levy on specific forms of energy supplied to industrial, commercial and public sector users.
CHP operator	The person who operates a CHP station or who generates or produces electricity in that station.
CHPQA	The Combined Heat and Power Quality Assurance Standard Issue 1, November 2000 originally published by the Department for the Environment, Transport and the Regions (including version Final 1.0 of each relevant CHPQA Guidance Note plus any later versions of that CHPQA Standard and Guidance Notes).
Carbon price support (CPS) rates of CCL	A rate of CCL on fossil fuels used to generate electricity
Direct supply	A supply made under a contract involving only the person designated under the CHPQA and the customer, with no intermediary third party taking ownership of the electricity. Direct supplies include those made through the distribution system of a licensed electricity distributor, provided no one else takes ownership of the electricity.
Electricity utility	The holder of either: (a) a licence under section 6(1)(d) of the Electricity Act 1989 (supply licences), or (b) a licence under Article 10(1)(c) or (2) of the Electricity Supply (Northern Ireland) Order 1992, except where the holder is acting otherwise than for purposes connected with the carrying on of activities authorised by the licence. Alternatively, the Commissioners for HMRC may direct under the provisions of Finance Act 2000 Schedule 6 paragraph 151(1) that a person is to be treated as an electricity utility for the purposes of CCL.
Finance Act 2000	Main primary legislation covering CCL — see Schedules 6 and 7.
Fully exempt CHP	A combined heat and power station in respect of which there is in force a certificate: (a) given by the Secretary of State, and (b) stating that the station is a fully exempt combined heat and power station for the purposes of the levy.
Good quality CHP	Good quality CHP is a measure of a CHP station’s energy efficiency and environmental performance determined under the CHPQA programme and based against the achievement of specific criteria contained in the CHPQA Standard and accompanying CHPQA Guidance Notes. Good quality CHP does not attract the main rates of CCL.
Licensed supplier	The holder of either: (a) a licence under section 6(1)(d) of the Electricity Act 1989 (supply licences) or, (b) a licence under Article 10(1)(c) or (2) of the Electricity Supply (Northern Ireland) Order 1992, except where the holder is acting otherwise than for purposes connected with the carrying on of activities authorised by the licence.
MWh	Megawatt-hour.
Outputs	Electricity or motive power, heat or steam, and air or water that has been heated or cooled.
Partly exempt CHP	A combined heat and power station in respect of which there is in force a certificate (a) given by the Secretary of State, and (b) stating that the station is a partly exempt combined heat and power station for the purposes of the levy.
Power Efficiency	One of two key parameters in the CHPQA Standard for assessing a CHP Scheme (the other being the Quality Index). It’s the total annual power output (CHPTPO) divided by the total annual fuel input (CHPQFI). (See CHPQA Standard).
PP11 certificate	A certificate given by the consumer of a taxable commodity to the supplier of a taxable commodity claiming relief from CCL
QPO	Qualifying Power Output of a CHP station.
QPO electricity	Electricity produced in a fully exempt CHP or in a partly exempt CHP up to its QPO limit.
Quality Index (QI)	One of two key parameters in the CHPQA Standard for assessing a CHP station (the other being the Power Efficiency). QI is an indicator of the energy efficiency and environmental performance of a station, relative to the generation of the same amounts of heat and power by separate, alternative means. (See CHPQA Standard).
QFI	Qualifying Fuel Input of a CHP station.
Self-supplies	Where the producer of electricity, having produced it from other taxable commodities, makes no supply of that electricity to another person but causes it to be consumed in the UK.
Supplier certificate (form PP11)	A certificate given by the consumer of a taxable commodity to the supplier of a taxable commodity claiming relief from CCL.
Taxable commodity	An energy product that is subject to CCL, such as: electricity any gas in a gaseous state that is of a kind supplied by a gas utility any petroleum gas, or other gaseous hydrocarbon, in a liquid state coal and lignite coke and semi-coke, of coal or lignite petroleum coke
Taxable supply	A supply of a taxable commodity on which CCL is chargeable.
TFI	Total Fuel Input of a CHP station.
TPO	Total Power Output of a CHP station.

Your rights and obligations

The HMRC Charter explains what you can expect from us and what we expect from you.

Comments or suggestions

Contact HMRC if you have any comments or suggestions to make about this notice.

Putting things right

If you are unhappy with our service, please contact the person or office you have been dealing with. They will try to put things right. If you are still unhappy, they will tell you how to complain.

Find out how to make a complaint to HMRC.

How we use your information

Find out how HMRC uses the information we hold about you.