Exempting energy intensive industries from the indirect costs of the renewables obligation: consultation analysis

4. Consultation Questions

1a Does the current eligibility threshold (20% electricity intensity) create any competitive distortions?

2 responses suggested that the current eligibility threshold for EII exemption does create competitive distortions. Whilst a third respondent did not answer question 1a directly, further reasoning was provided in the "please provide evidence/explanation for your answer" section. This asserted that an eligibility threshold would create some level of competitive disadvantage, regardless of where the threshold is set.

Key points raised:

• GVA can increase with profitability, and this can impact on whether a company is exempt or not, regardless of if they, the same levels of electricity as their competitors
• Other EU countries implement a lower exemption threshold, and some UK companies also have to compete with this
• The mechanism of levies on energy bills will create competitive distortions. This should be replaced with a general taxation system, proportionate to earnings
• By reducing the level of exposure to a proportion of customers, the exposure of non-eligible customers will always increase

Whilst responses provided some insight, none provided strong evidence that competitive distortions do exist.

1b If so, which options set out by BEIS would best address such distortions

3 responses were given to question 1b. In expressing support for lowering the threshold in line with the options proposed by BEIS, 2 responses showed preference for option 2 (15% electricity intensity threshold) and option 3 (10% electricity threshold). A third response provided no direct preference for any of the 3 options.

Key points raised:

• A low threshold of 10% would provide the maximum mitigation of falling out of eligibility from an eligible business perspective
• To reduce the impact on other electricity consumers, a 15% threshold could be chosen
• If a decision is made to widen eligibility, this should only be extended to those who can sufficiently evidence the existence of competitive disadvantage
• There is an increased burden on administrators to provide exemptions to newly exempted businesses
• The uncertainty about the volume of exempt electricity limits an energy supplier's ability to accurately forecast costs for customers

1c Should the Scottish Government consider amending the ROS to deliver similar (or the same) changes?

Of the 3 responses, support for the Scottish Government making similar, or the same changes proposed in the BEIS consultation, was unanimous. Whilst 1 respondent did not answer this question directly, further reasoning was provided in the "please provide evidence/explanation for your answer" section.

Key Points:

• Different changes in Scotland will create market distortions for businesses competing across the UK
• From an administrative perspective of eligible businesses who operate in both Scotland and England, rules should be the same across the UK
• All consumers will benefit from consistency across the two schemes
• Should SG decide to take a different approach, attention should be given to clear guidelines to reduce the risk of increased administrative burdens

2a Are there alternative options to operate the RO(S) exemption eligibility in Scotland?

1 response suggested that an alternative option for managing the exemption of EII from ROS costs. The remaining 2 responses did not think alternative options existed.

2b If so, what forms could these alternatives take?

Respondents who answered "No" to question 2a did not provide any response to question 2b. 1 response presented an alternative option for managing exemption of EII.

Key points:

• The Renewables Obligation policies should be funded progressively, through general taxation, not levies on energy bills.
• Where a general taxation approach is taken, it should be applied GB-wide.

2c What impact would divergent eligibility rules in Scotland create for Energy Intensive Industries, non-exempt businesses and consumers?

2 responses were given for this question. Both signalled opposition to a divergent approach across Scotland and the rest of the UK.

Key Points:

• A commercial disadvantage would arise if different rules exist. Where the market for goods is UK-wide, the same rules should be applied
• A divergent approach is likely to increase confusion amongst eligible and ineligible consumers.

Overall Findings

The consultation received a limited number of responses which were polarised in their opinion of extending or maintaining the existing electricity intensity threshold. Responses were however unanimous in emphasising the need for maintaining parity with the Renewables Obligation for England and Wales.

Next Steps

The Scottish Government would like to thank all respondents for taking the time reply to this consultation. We will publish a response in due course.

Scottish Government
Energy Industries Division
Industrial Decarbonisation Team

October 2019