Ministers rule out low-carbon generation levy tax breaks

The government has rejected offering renewable generators similar low-carbon tax breaks to those introduced for the gas and oil windfall profits levy.

In its report on ‘Accelerating the Transition from Fossil Fuels and Securing Energy Supplies’, published in December, the House of Commons environment audit committee recommended introducing a low-carbon investment allowance in the government’s Electricity Generators Levy (EGL).

This would bring the EGL, under which low-carbon generators will be subject to a 45% rate on “extraordinary” returns, into line with the investment relief on offer in the Energy Profits Levy (EPL) on fossil fuel companies.

This allowance means that these gas and oil companies can recoup almost all of their investment against tax.

However, in its response to the committee’s report, which was published on Thursday (23 March), the government said it does not accept this recommendation.

It justifies this stance on the ground that the government is already supporting renewables deployment through a range of other policy levers, such as the Contracts for Difference (CfD) scheme.

In addition, the government says the EGL is based on extraordinary returns rather than total profits, unlike the EPL, resulting in a lower overall rate.

The government’s response also pours cold water on the committee’s call for a share of revenues from the EPL to be earmarked, or hypothecated, for energy efficiency improvements.

It expresses “considerable fiscal sustainability concerns” about hypothecation, mostly due to the potential volatility of EPL revenues and the constraints this move would impose on the management of public finances.

The government also rejects the committee’s recommendation that installation of solar PV panels should be mandatory on the roofs of new developments, such as on south facing roofs, when the Future Homes Standards is introduced in 2025.

The response says making solar panels mandatory would be “largely redundant” because in order to comply with a recently introduced uplift in energy efficiency standards, most developers will choose to install low-carbon technology on new homes.

The committee expressed concern that the response showed a failure to engage in a meaningful way with many of its recommendations, while not acknowledging the “slow progress” achieved through policy incentives on energy efficiency over the past ten years.

In a letter to energy security and net zero secretary of state Grant Shapps, the committee’s chairman, Philip Dunne MP expressed disappointment with the overall content and tone of the response which members branded “dismissive”.

He said: “Over the course of several months our committee heard from expert witnesses on how the UK could phase out fossil fuels while ensuring that households could continue to power and heat their homes. Our report took forward many of these proposals, supported by evidence that the measures were practicable and achievable.

“It is therefore disappointing to find not only that in its response to our report the government failed to accept a single recommendation, but also that it did not engage at all with many of the proposals we had made. Instead, we received a response which reiterated existing policy initiatives. These initiatives in themselves are clearly insufficient to accelerate emissions reductions at a pace necessary to put us firmly on the path to net zero.

“The government has another chance, later this month, to demonstrate its ambition by setting out achievable targets and coherent action plans. I look forward to the government’s ‘Green Day’ later in March when the net zero strategy refresh and the government response to the Skidmore Review will be published. This comes at a pertinent time following the IPCC’s recent warnings that the world is likely to breach the Paris goals of 1.5°C additional warming in the 2030s: we must rapidly identify ways to reduce consumption of fossil fuels yet further.

“I expect that in the light of these significant announcements ministers will wish to update the government’s response to our recent report.”