Renewables Obligation (Scotland) - energy intensive industries: consultation

Introduction-Purpose of this Consultation Paper

1. This consultation enables the Scottish Government to fulfil its obligation in parallel with the UK Government which is seeking views on the exemption scheme for energy-intensive industries (EII) from the indirect costs of funding the Contracts for Difference (CfD), Renewables Obligation (RO) and small-scale Feed-in Tariffs (FIT) schemes (collectively defined as the "Exemption Scheme" or "Scheme").

2. The Scottish Government is seeking feedback and evidence to consider whether there is a rationale for increased measures to mitigate the increased costs of electricity due to renewable electricity policies and whether existing measures need to be amended.

Territorial extent

3. This consultation covers Scotland. A parallel consultation is taking place that covers England and Wales^[1] which covers many general aspects of Scheme scope and its operation. Many of these issues relate to reserved powers and are therefore not considered in this consultation. We encourage Scottish EII stakeholders to reply to the Department for Business, Energy & Industrial Strategy (BEIS) consultation on these aspects of the Scheme, in addition to the option of responding to specific questions in this consultation.

4. Further information on the consultation being undertaken by BEIS, and how Scottish stakeholders may reply, is provided below.

Scope of this consultation

5. This consultation is limited to the following specific aspects of the review:

• The Renewables Obligation Scotland 2009 (ROS) (amended).
• The ROS will be subject to the timing of any changes receiving sufficient information to support the relevant control assessment. Therefore, any amendment to the EII Regulations will be subject to the draft affirmative procedure in the Scottish Parliament.
• The UK Government will be consulting in parallel as the Renewable Obligation is devolved in England and Wales. The Exemption Scheme does not operate in Northern Ireland.

6. The Scottish Government has limited the scope of this consultation for the following reasons:

• The operation of the Exemption Scheme is carried out by the UK Government including for eligible businesses located in Scotland;
• Scotland does not have devolved powers regarding the CfD and FIT;
• A previous consultation (2018) on widening the eligibility for the ROS had only a handful of responses.
• The administration of the Scheme is carried out at Great Britain (GB) level and this covers entry tests – business level and sector level - where there is no apparent benefit of divergence and limited powers to do so - for only the RO part of the Scheme, for which we don't have specific data on size of funds to potentially redistribute;
• The rationale for undertaking the review is the same for Scottish stakeholders, with the significant impacts felt by any proposed changes likely felt by a similar profile of primary EII stakeholders;
• The key change proposed by the UK Government, a commitment that was stated within the UK Energy Security Strategy of 7 April 2022 - is to consider including increasing the subsidy intensity of the CfD, RO and FIT exemption to 100%.
• BEIS consultation document provides an overview of the available evidence regarding the impacts of the CfD, the RO, FIT on electricity prices and subsequently on international competitiveness and the potential increasing risk of carbon leakage.
• With other parts of the UK we share the intent to promote measures to support business, and a level-playing field to operate within.

7. The Scottish Government may consult further with stakeholders depending on the outcomes of the UK Government's consultation or after studying the responses by Scottish stakeholders to this consultation.

8. The Scottish Government has a devolved responsibility for the operation of the ROS. To ensure that EII operating all or in part within Scotland are granted equal consideration as those across GB, it is our intention to follow the same approach as BEIS in investigating the impacts of any possible changes to the current exemption mechanism.

Scope of the UK Government's consultation

9. BEIS' are considering all aspects of the current Exemption Scheme including its benefits to stakeholders and whether, and how, to continue the Scheme for the longer-term in the context of the UK's subsidy control regime and broader Government objectives. The review covers all aspects, these are listed in Table 1 below

Table 1

UK Government Consultation Aspects

Rationale for Exemption Scheme

Rationale for undertaking the review

Scope of the review

Timing of any changes

Purpose of the consultation

Subsidy Control

Analytical Evidence Base

Review of the Exemption Scheme (including Subsidy Intensity)

Review of the Design of the Exemption Scheme

10. Stakeholders in Scotland are invited to access the parallel consultation here: BEIS - Review of the scheme to provide relief to energy intensive industries for a proportion of the indirect costs of funding renewable electricity policies . We have liaised with BEIS on this approach.

Renewables Obligation - specific Scottish aspects related to the Exemption Scheme

11. The review includes a section that addresses proposed changes to the Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015 (the EII Regulations) (which contain the criteria for the exemption) and to the Renewables Obligation Order 2015 (in respect of the arrangements for setting the level for the 2023/24 obligation period).

12. In Scotland this consultation will address proposed similar changes to the Renewables Obligation (Scotland) Order 2009.

13. In addition to many of the general aspects listed in Table 1, BEIS' document contains the following sections that we do not intend to reproduce because we propose the same approach for calculations in Scotland (instead they are clearly signposted using the link above).

• How the RO works
• Calculating the obligation level for England and Wales
• Calculating the total number of ROCs required for a supplier to discharge its annual Renewables Obligation
• Energy Intensive Industries exemption
• Publication of the 2023/24 obligation level

14. The Renewables Obligation (RO) is a domestic energy and climate change policy designed to encourage investment in low carbon and renewable electricity generation and support the achievement of national decarbonisation targets. Scotland has a devolved responsibility for managing the RO in Scotland. The cost associated with funding this scheme is recovered through obligations and levies on electricity suppliers, which are passed on to consumers through their electricity bills.

15. In 2017, the Scottish Government and the UK Government delivered legislative changes to create a scheme that exempts EII from a proportion of the indirect cost of the RO which are significantly large for these types of businesses. This replaced the previous compensation scheme from 1^st April 2018. The UK Government made similar provisions to exempt industry from a proportion of the indirect costs of the (CfD) scheme.

16. Given our devolved responsibility for the RO in Scotland (the ROS)^[2], in 2018 the Scottish Government consulted alongside the UK government to seek views and evidence from stakeholders on widening eligibility. This was a response to criticism that current rules create competitive distortions - by providing those who are eligible with a lower cost per unit of electricity, relative to ineligible businesses who operate in the same market

17. The Scottish Government response for the 2018 consultation is accessible online.

Consultation Questions

18. The Scottish Government is obliged to gather responses from Scottish stakeholders from the following questions, which are reproduced from the BEIS consultation:

(i) What benefits does the electricity relief exemption scheme provide to energy intensive industries including, how the scheme addresses the issue of carbon leakage?

(ii) Do you agree with our proposal to replace the reference to UID with AIEA in the guidance?

(iii) Do you agree that we, where relevant, use a five year rather than three-year baseline to reflect the impact of the Covid Pandemic to businesses? Please explain why.

(iv) Should we consider accepting applications from businesses with fewer than two financial quarters of financial data? Please explain why?

(v) Is the 85% level of exemption sufficient for your business or sector? If not, please provide supporting evidence to demonstrate why not.

(vi) If we were to consider increasing the subsidy intensity level, what level would be appropriate? Please provide supporting evidence for your answer.

(vii) Do you agree that supporting industry to decarbonise through existing decarbonisation and net zero strategies is the appropriate approach for EIIs? Please add further information to support your response.

(viii) Do you agree with our proposal to adjust the 2023/24 renewable obligation level partway through the obligation year (if proposed changes are made as a result of this consultation)? If not, please explain why and, if possible, suggest alternative approaches.

(ix) Do you consider that a minimum of three months' notice between the revised obligation level being published and implemented, is reasonable (if proposed changes are made to the Exemption Scheme as a result of this consultation)? If not, please explain why and, if possible, suggest alternative approaches.

For Consideration/ Points to Note

19. The Energy Efficient Scotland route map launched in May 2018. This wide-reaching programme to invest in our existing buildings will improve energy performance.

20. The Scottish Government currently provides free advice and support to Scottish SME's to understand how to become more energy efficient, reduce energy bills and decarbonise, through Business Energy Scotland (BES). BES is responsible for signposting businesses to the Scottish Government funded SME Loan fund. Scottish SMEs support to invest in energy efficiency measures to save money and resources.

21. As laid out in our Energy Strategy, we are working with Scottish industry to build on existing programmes of support and to reduce their costs by encouraging investment in energy efficiency. This can reduce operating costs and protect against energy price rises

22. Consideration should also be given to the fact that if the UK Government decides that the subsidy intensity should be raised, but Scotland does not in parallel raise its subsidy intensity, this may create discrepancies across GB. If Scotland have a lower subsidy intensity, Scottish industrial bodies consuming the same proportions of electricity as their UK counterparts, may not receive the same benefit.