Combined heat and power schemes

HMRC Reference:Notice CCL1/2 (October 2013) View Change History
 

Contents

Foreword

Other notices and forms on this or related subjects

1.Introduction

1.1 What is this notice about?

1.2 What has changed

1.3 Who should read this notice

2.CHP, the CHPQA and the CCL exemptions

2.1 A CHP station for CCL purposes

2.2 The CHPQA programme

2.3 Exemptions from the main rates of CCL

2.4 Registering for CCL

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

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

3.3 Declaring entitlement to the exemption

3.4 Reviewing entitlement to the exemption

4.Exemption for CHP produced electricity

4.1 Working out how much electricity qualifies

4.2 Supplies of Qualifying Power Output (QPO) electricity

5.Non-exporting stations (CHP electricity that is all either directly or self-supplied)

5.1 Determining the extent of CCL exemption

6.Exporting stations (indirect supplies)

6.1 Identifying the qualifying power output

6.2 Levy exemption certificates

6.3 CHP stations co-fired with taxable commodities and renewable source input fuel

6.4 CHP outputs record

6.5 Transitional arrangements for reconciling CHP electricity output

6.7 Penalties

7.Supplies of Good Quality CHP source electricity by electricity utilities (indirect supplies)

7.1 How the exemption operates

7.2 A CHP declaration

7.3 Prescribed conditions

7.4 Notification that relevant conditions have been made

7.5 Balancing and averaging

7.6 How the balancing and averaging calculation works

7.7 How is the exemption applied to customer accounts?

8.Use of CHP LECs by electricity suppliers

8.1 CHP LECs

8.2 Acquisition of GQCHP source electricity

8.3 Sell and buy back arrangements

8.4 Supplies of GQCHP source electricity

8.5 Notification to Ofgem or NIAUR

9.Glossary

Your rights and obligations

Do you have any comments or suggestions?

Putting things right

How we use your information

 

Foreword

This notice cancels and replaces Notice CCL1/2 November 2011.

Other notices and forms on this or related subjects

Notices

CCL1 A general guide to climate change levy

CCL1/1 Registering for climate change levy

CCL1/3 Climate change levy: reliefs and special treatments for taxable commodities

CCL1/4 Climate change levy: electricity from renewable sources

CCL 1/5 Climate change levy: penalties and interest

CCL1/6 A guide to the carbon price floor

Forms

PP10 CCL Supporting Analysis

PP11 CCL Supplier Certificate

CCL 200 X Tax Credit Claim

1.Introduction

1.1 What is this notice about?

This notice explains the liability to the main rates of climate change levy (CCL) of taxable commodities supplied (a) to a combined heat and power (CHP) station and (b) by a CHP station. It also provides guidance to electricity utilities who wish to supply Good Quality CHP source electricity to consumers.

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 CCL1/6 Notice A Guide to the Carbon Price Floor.

1.2 What has changed

This notice, dated October 2013, replaces the edition of November 2011. In particular it explains the transitional arrangements that have been put in place following the withdrawal of the “indirect supply” exemption in respect of Good Quality electricity that is produced in either a fully exempt CHP station or a partly exempt CHP station on or after 1 April 2013. See paragraph 2.3.

The main changes to its content are in the following parts of the notice:

Paragraph/Section


Content


Section 2


CHP the CHPQA and the CCL exemptions


Section 3


Supplies of taxable commodities to CHP stations


Section 4


Exemption for CHP produced electricity


Section 6


Exporting stations (indirect supplies)


Section 7


Supplies of good quality CHP source electricity by electricity utilities (indirect supplies)


Section 8


Use of CHP LECs by electricity suppliers


Section 9


Glossary


1.3 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, and where we say ‘we’ ‘our’ or ‘us’ we mean HM Revenue & Customs (HMRC).

2.CHP, the 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 of Energy and Climate Change’s (DECC’s) CHP Quality Assurance (CHPQA) programme (see paragraph 2.2)
  • certified annually under that programme, and
  • covered by a valid CCL Exemption Certificate issued by DECC’s 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, and the extent to which both input fuels used by it and electricity generated by it will not be liable to the main rates of CCL or may be liable to a lower amount when compared with conventional electricity generators.

2.2 The CHPQA programme

The CHPQA is a voluntary programme carried out on behalf of DECC 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 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.

Further information on the CHPQA programme can be found on the CHPQA website.

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 below.
  • The exemption for qualifying electricity produced by a CHP is dealt with in sections 4 to 8 below. Section 4 deals with how to work out how much electricity qualifies for exemption. There are three potential routes for that electricity:
    - direct supplies between the CHP operator and customer - this is dealt with in section 5 below
    - self supplies, where producers use the electricity themselves - this is also dealt with in section 5 below
    - indirect supplies to an electricity utility who sells the electricity to the consumer - this is dealt with in sections 6, 7 and 8 below. Although we include details about the use of levy exemption certificates to support claims to exemption in relation to qualifying electricity that was produced in either a fully exempt CHP station or a partly exempt CHP station before 1 April 2013, the indirect supply exemption is no longer available for CHP electricity that is produced after that date.

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 do not need to register with us (unless you are liable to account for the carbon price support (CPS) rates of CCL). However, if you qualify only on some of your outputs, you will need to register with us for the levy where you are making taxable supplies.

Further information on registering for the levy can be found in CCL1/1 Registering 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 per cent.

'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 per cent, 75 per cent CCL relief can be claimed on the input fuel used.

3.3 Declaring entitlement to the exemption

You should use the PP11 CCL 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. (See Notice CCL 1/3: 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 DECC for Secretary of State certificate purposes, you must conduct a review of your PP11 Supplier Certificate and 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-/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 have claimed too much relief and therefore underpaid the main rates of CCL, you must declare and pay the underpaid CCL to us. If you are registered for CCL, you must account for the tax on your next CCL return. If you are 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 you have claimed too little relief and therefore overpaid the main rates of CCL, you should offset the CCL credit against the CCL due on your return (where you are registered) or make a claim for tax credit (where you are not).

Where the relief entitlement claimed matches actual entitlement, no action is required and the PP11 CCL Supplier Certificate remains in force for a further year (subject a maximum period of validity of five years).

3.4.3 Liability to register for CCL arising from reconciliation

As explained in paragraph 2.4, if you make taxable supplies – including taxable self-supplies - you must notify us accordingly and register for the main rates of CCL. However, where a liability to register arises solely through the reconciliation of relief claimed on taxable commodities used as CHP input fuel, we may exempt you from registration under certain conditions. Information on applying for exemption from registration and the conditions that must be satisfied can be found in Notice CCL 1/1 Registering for Climate Change Levy.

3.4.4 Claiming a CCL credit

All claims for credit of CCL should be made on form CCL 200 X Tax Credit Claim available from our Helpline on 0300 200 3700 and submitted together with supporting documents (a copy of your supplier certificate and supporting analysis together a copy of your review calculations) to:

HM Revenue & Customs
Central Collection Unit (CCL)
Alexander House
Southend on Sea
SS99 1AY

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 sort out errors, the 30-day period can be extended.

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 and 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.

Supply


Route


Section


Direct supply


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 via the distribution system of a licensed electricity supplier, provided that supplier does not take ownership of the electricity.)


See section 5 below


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 it itself. Guidance on the application of the self-supply rules can be found in Notice CCL1 A general guide to climate change levy.


See section 5 below


Indirect supplies (that is, supplies to the final consumer made by electricity utilities) of QPO electricity are only exempt from the main rates of CCL where the electricity was generated before 1 April 2013 (as evidenced by CHP LECs) and the supply is made under the terms of a contract containing a CHP declaration before 1 April 2018. Sections 6, 7 and 8 provide further information about the exemption for indirect supplies.

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. For information on registration, see Notice CCL1/1 Registering for climate change levy.

5.Non-exporting stations (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 adjustments indicated below 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

Where the QPO equals the total power output (TPO) (so the station is fully exempt under the CHPQA programme), or where the proportion of QPO compared with TPO is unchanged for a partly exempt station, no further action is required.

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 will be liable to register for the main rates of CCL (if you are 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 and/or CPS rate) due on your return (where you have a liability to register for CCL), or
  • submit a CCL200X Tax Credit Claim form (where no registration is required).

6.Exporting stations (indirect supplies)

6.1 Identifying the qualifying power output

Where any of the electricity produced in your CHP station is supplied indirectly (i.e. through a third party), CHP levy exemption certificates (CHP LECs) are issued for the QPO electricity produced in the station before 1 April 2013 providing it fairly represents electricity allocated for consumption within the UK.

The Office of the Gas and Electricity Markets (Ofgem) or the Northern Ireland Authority for Utility Regulation (NIAUR) as relevant Authorities, are responsible for the issue of CHP LECs. NIAUR issue LECs to CHP operators based in Northern Ireland and the Republic of Ireland, with Ofgem issuing LECs to CHP operators based elsewhere.

6.2 Levy exemption certificates

Where your CHP station has been assessed under the CHPQA programme and holds a valid and current Secretary of State certificate, you should notify Ofgem or NIAUR of the electricity output of your station on a monthly basis. This figure should exclude any electricity that is not for consumption in the UK. (The output of a station is based on the metering requirements of the CHPQA programme as published within the Guidance Notes for the programme. Details can be obtained from the DECC website.)

CHP LECs are issued monthly, up to three months in arrears, based on the amount of QPO electricity within the total output notified by the station operator. Guidance on the LEC issue procedure can be found on the Ofgem or NIAUR websites.

A CHP LEC certifies each Megawatt hour (MWh) of QPO electricity produced and carries a unique reference number incorporating a station identifier. Neither Ofgem nor NIAUR issue LECs for a fraction of a MWh, but carry forward any remaining fraction to the following month.

Where an Authority becomes aware that it has issued a CHP LEC in relation to electricity produced:

(a) when there was no Secretary of State Certificate in force, or

(b) where there has been a breach of the metering standards required under the CHPQA,

it will restrict the validity of the CHP LEC to indirect supplies and notify the CHP operator that it has done so. Electricity shall not be regarded as QPO electricity unless it remains the subject of an unrestricted CHP LEC. This ensures that electricity utilities are not prevented from allocating the restricted CHP LECs, which they would have obtained in good faith, against exempt supplies.

Where an Authority reasonably believes the CHP operator is not complying with the requirement to keep a CHP outputs record (see paragraph 6.4) they will refuse to certify or issue any CHP LEC in relation to electricity produced in the station.

They will also restrict the validity of any relevant and as yet unrestricted CHP LEC to indirect supplies.

Following the expiry of the European Commission’s State aid approval, the CCL exemption for the “indirect supply” of Good Quality CHP electricity has been withdrawn.

Good Quality electricity that is produced in either a fully exempt CHP station or a partly exempt CHP station on or after 1 April 2013 that is supplied to a consumer other than direct from the station itself can no longer benefit from CCL relief. In recognition, CHP LECs are no longer issued in respect of electricity produced in a CHP after 31 March 2013.

6.3 CHP stations co-fired with taxable commodities and renewable source input fuel

In recognition of the enhanced environmental benefits of generating electricity from a CHP station co-fired with renewable and fossil fuels (for example, gas and waste), both renewable source electricity (RSE) LECs and CHP LECs are issued in respect of the station's notified output.

Electricity generated from renewable sources is also liable to exemption – see CCL1/4 Climate change levy: electricity from renewable sources. The removal of the CCL exemption for indirect supplies of QPO electricity does not affect the issue of renewable LECs.

Ofgem or NIAUR will establish the percentage of the total power output (TPO) that may be considered as RSE and issue renewable LECs for that. In addition, CHP LECs will be issued for QPO electricity generated before 1 April 2013. This will be based on the total output less that fraction which is considered to be renewable source electricity as illustrated in the following examples:

CHP (A)

Total Power Output (MWh)


RSE content per cent (MWh)


QPO to TPO ratio per cent


RSE LECs


CHP LECs


Total LECs


100


10


50


10


45


55


CHP (B)

Total Power Output (MWh)


RSE content per cent (MWh)


QPO to TPO ratio per cent


RSE LECs


CHP LECs


Total LECs


100


50


50


50


25


75


CHP (C)

Total Power Output (MWh)


RSE content per cent (MWh)


QPO to TPO ratio per cent


RSE LECs


CHP LECs


Total LECs


100


10


95


10


85 (with 0.5 c/f)


95


6.4 CHP outputs record

You must keep a record of the allocation of each MWh of QPO electricity in your CHP station and each CHP LEC issued showing:

  • self-supplies
  • direct supplies, and
  • indirect supplies.

The LEC must be allocated no later than the end of the second month following the one in which it was issued.

Once allocated to a supply, a CHP LEC cannot be allocated to any other supply.

You should retain LECs allocated to self-supplies and direct supplies. LECs that have been issued in respect of electricity that will be the subject of an indirect supply should be passed to the person making the indirect supply (see section 7).

Your record must also show the quantity of all electricity that is an output of a station (QPO and non-QPO) including any renewable source electricity or electricity produced where no exemption certificate is in force for the station.

6.5 Transitional arrangements for reconciling CHP electricity output

6.5.1 The reason for reconciliation

A CHPQA certificate is issued for each year of operation taken from a self- assessment undertaken by the station’s responsible person. That self-assessment must be based on actual operational data.

In the calendar year 2012, for example, the CHPQA certificate reflected the actual performance of the station during for the year ending 31 December 2011. The actual performance of the station in 2012 will not be known until self-assessment and CHPQA certification take place in 2013.

CHP LECs are issued on the basis of a provisional estimate of the station’s performance in the current year, taken from the data contained on the current CHPQA certificate.

6.5.2 Reconciliation of CHP electricity generated in 2012

Following self-assessment in 2013, and the submission of the resulting CHPQA certificate to DECC for Secretary of State certification purposes DECC will pass the relevant information to Ofgem or NIAUR who will then determine whether, on the basis of the updated certificate and the amount of QPO electricity actually produced, too many or too few LECs have been issued.

Where it is determined that a shortfall occurred, further LECs will be issued showing a current date of issue. They must be allocated in the outputs record within 60 days of issue. No action will be taken by Ofgem where it is determined that an excess of LECs had been issued.

6.5.3 CHP electricity generated in 2013

Ofgem and NIAUR will not carry out any final reconciliation of electricity generated against the LECs issued between 1 January 2013 and 31 March 2013. However, based on any updated information received, they may choose to issue additional LECs for that period to supplement those already issued. Where this is done, all LECs issued form part of a provisional QPO established for the Annual Operation.

The operators will undertake the final reconciliation themselves upon receipt of their 2014 CHPQA certificates covering 2013 actual performance.

Electricity produced on or after 1 April 2013 would also be considered QPO up to the point the provisional QPO limit has been reached (e.g. that limit being the amount of QPO as represented by ‘X’ CHP LECs issued between 1 January and 31 March plus MWh “Y” onwards up to the provisional QPO limit).

In calculating the point at which the QPO limit for the Annual Operation has been reached, for electricity produced on or after 1 April 2013, operators of partly exempt stations 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.

When the actual performance of the CHP station for the 2013 is known and certified, and a copy of the current CHPQA certificate is sent to the Secretary of State (by 30th June), the operators will need to undertake the reconciliation themselves by following the guidance for non- exporting stations at section 5. When taking into account the CCL adjustments relative to the QPO produced they may need to take account of any fluctuation in performance that has affected the provisional QPO this will include the number of CHP LECs (issued between 1 January and 31 March) that have been issued to them which represent the provisional QPO established for 2013.

6.5.4 Reconciliation arrangements where you cease trading or are no longer in the CHPQA programme

Before 1 January 2012 where a final CHPQA certificate has been submitted Ofgem or NIAUR will carry out a reconciliation where it will restrict the validity of any over-issue to indirect supplies and notify the operator that it has done so. This restriction means that LECs will still be valid where they are in the hands of electricity utilities, but you may suffer a penalty for any deficit in the output record.

Where additional LECs are issued, they must be allocated in the outputs record within 60 days.

Further information on the role of Ofgem and NIAUR in the administration of CHP LECs can be found on their websites (see links below).

Ofgem

NIAUR

Alternatively, they can be contacted by phone on the following numbers:

Ofgem: 020 7901 7000
NIAUR: 028 9031 1575

6.7 Penalties

Where the CHP outputs record indicates:

(a) a deficit of unrestricted CHP LECs in relation to the total quantity of QPO electricity self or directly supplied, and/or

(b) a deficit of unrestricted plus restricted CHP LECs in relation to the total quantity of QPO electricity self, directly and indirectly supplied

each deficit representing 1 MWh shall be liable to a penalty of £250. HMRC can mitigate the penalty; the circumstances of each case will be taken into account when considering the appropriate level of mitigation.

7.Supplies of Good Quality CHP source electricity by electricity utilities (indirect supplies)

7.1 How the exemption operates

You identify the proportion of the electricity you sell that represents purchased or generated QPO electricity, and choose to offer it as good quality CHP (GQCHP) source electricity for sale to your customers. Electricity is only GQCHP source electricity for the purpose of the exemption if it remains the subject of an unrestricted or restricted CHP LEC.

A supply of GQCHP source electricity to a final consumer is exempt from the main rates of CCL where:

  • the supply is made under a contract that contains a CHP declaration given by the supplier
  • prescribed conditions are fulfilled
  • the supplier and each other person, who may be the generator of any CHP electricity, have notified us and Ofgem or NIAUR in writing that those conditions can be met (see paragraph 7.4 for an example of such a notification and where to send it), and
  • the supply is made before 1 April 2018.

7.2 A CHP declaration

A CHP declaration is a statement by the electricity supplier that he will, in each ‘averaging period’, acquire or generate at least as much GQCHP source electricity as the amount of electricity he supplies exempt from CCL under CHP contracts.

7.3 Prescribed conditions

The prescribed conditions for HMRC purposes are set out in Part IV(A) of, and Schedule 2 to, the Climate Change Levy (General) Regulations 2001 and include the following:

  • providing CHP declarations
  • supplying information in respect of supplies of GQCHP source electricity
  • facilitating the inspection of records relating to supplies of GQCHP source electricity
  • allowing entry into premises for audit purposes, and
  • facilitating monitoring of the use of LECs by Ofgem or NIAUR.

Ofgem and NIAUR are required to supply HMRC with information in respect of the administration of the exemption including about electricity and gas legislation.

7.4 Notification that relevant conditions have been made

As indicated in paragraph 7.1 above, one of the conditions for exemption is that the supplier and each other person, who may be the generator of any CHP electricity, have notified us and Ofgem or NIAUR in writing that those conditions can be met.

An example of a notification by both a supplier and a generator follows:

Supplier notification

Dear Sir,

Climate Change Levy (CCL)

Notification Under Finance Act 2000, Schedule 6 paragraph 20A(1)(d)

Exemption: Electricity produced in combined heat and power stations

I am writing to notify you that [company name] wishes to supply GQCHP source electricity, exempt of CCL. I confirm that [company name] agrees to fulfil the conditions in relation to such supplies insofar as they apply.

If you have any queries please contact me at the above address.

Yours faithfully

Generator notification

Dear Sir,

Climate Change Levy (CCL)

Notification under Finance Act 2000, Schedule 6 paragraph 20A(1)(d)

Exemption: Electricity produced in combined heat and power stations

I am writing to notify you that I am a generator of qualifying power output (QPO) electricity. I confirm that [company name] agrees to fulfil the conditions of the CCL exemption insofar as they apply.

If you have any queries please contact me at the above address.

Yours faithfully

The notification should be made to:

HM Revenue & Customs
Environment Taxes Information Centre
BP4002 Chillingham House
Benton Park View
Longbenton
Newcastle Upon Tyne
Tyne & Wear
NE98 1ZZ

7.5 Balancing and averaging

As outputs from CHP stations can sometimes be unpredictable, you are permitted to strike a balance by averaging out over an extended period the amount of GQCHP source electricity that you have generated or acquired as GQCHP source electricity against the amount of electricity that you have supplied exempt from CCL under CHP contract(s). This is called “balancing and averaging” and operates in the following way:

  • A balancing period lasts three months. When a balancing period ends a new one begins.
  • The first balancing and averaging periods both start when you make your first exempt supply of GQCHP source electricity.
  • The maximum length of an averaging period is two years but it may end sooner if:
    at the end of a balancing period there is a credit to carry forward, or
    your purchases and sales of GQCHP source electricity are equal.
    In either case a new averaging period begins.
  • When you stop making exempt supplies of GQCHP source electricity, the end of the balancing period in which your last exempt supply occurred is also the end of the averaging period.

7.6 How the balancing and averaging calculation works

At the end of each balancing period, you should add up the quantity of

    1. GQCHP source electricity you have acquired or generated in the period for the purposes of making a CCL exempt supply together with any balancing credit you have carried forward

    2. electricity supplied as exempt GQCHP source electricity in the period together with any balancing debit carried forward to that period.

If the total of (1) exceeds that of (2) then the averaging period within which the balancing period falls, ends. A credit equal to the difference of the two totals is carried forward to the next balancing period.

If the totals of (1) and (2) are the same then the averaging period within which the balancing period falls ends, and no credit or debit is carried forward.

If the total of (2) exceeds that of (1) then a balancing debit is carried forward into the next balancing period.

A debit can be carried forward into the next and subsequent balancing periods until either:

  • the averaging period within which the balancing periods fall reaches its two-year limit, or
  • you make your last exempt supply,

whichever happens first.

You are then liable to account for an amount equal to the amount that would be payable as CCL on a taxable supply that:

  • is made at the end of the balancing period, and
  • is of a quantity of electricity equal to the difference between the two totals.

Information about CCL returns and the payment of tax can be found in Notice CCL1 A general guide to climate change levy.

7.7 How is the exemption applied to customer accounts?

Where you and a customer enter in to a CHP contract, exemption from CCL is based upon the terms of the contract. However, you should provide the customer with a written notice for the duration of the CHP contract, updated as necessary, setting out how to identify those supplies of electricity that are or will be:

(a) made under the CHP contract, and

(b) referred to on a climate change levy accounting document (or an invoice) issued in respect of those supplies.

8.Use of CHP LECs by electricity suppliers

8.1 CHP LECs

To take account of the practicalities of distribution the exemption works on an 'equivalent amount' basis. CHP LECs form one part of the audit trail demonstrating that a quantity of electricity supplied to the final consumer 'matches' that generated as QPO electricity.

8.2 Acquisition of GQCHP source electricity

Before 1 April 2013, where you receive GQCHP source electricity the LEC should be transferred with it. This applies not only to 'hard-wire' supplies of qualifying output sold to you direct from the generator, but also where the contract wording or any other circumstances leave no doubt that the electricity originates from a qualifying source.

We generally accept that, where it is impossible to trace the source of a particular 'parcel' of electricity, the possession of CHP LECs sufficient to cover the quantity of electricity acquired determines that the electricity is GQCHP source electricity. However, where supplies of electricity to the holder of CHP LECs can be exclusively and demonstratively traced to a non-CHP source, possession of the CHP LECs will not alter this fact and the electricity cannot be treated as GQCHP source electricity for the purpose of the balancing and averaging calculation.

8.3 Sell and buy back arrangements

Before 1 April 2013, CHP operators and electricity utilities may enter into arrangements for both:

  • the sale by the CHP operator to the utility of electricity described as GQCHP source electricity, transferred together with the associated LEC, and
  • the purchase by the CHP operator from the utility of non-GQCHP source electricity.

Where such sell and buy back arrangements exist, you will be regarded as acquiring GQCHP source electricity only where all of the following conditions are met:

  • an electricity transmission/distribution system exists making the transfer of electricity to and from the CHP station physically possible
  • a clear audit trail exists, predominately based on metering, invoices and contracts (although where the quantities of electricity supplied in both directions are equal we recognise that, in practice, nothing may move through the meter)
  • the arrangement does not have retrospective effect (in this instance it does not seek to change what has already happened in reality), and
  • the quantities of GQCHP source electricity supplied do not exceed the station’s export capacity determined by the export metering information supplied on the relevant CHPQA form 'Form F2 - CHP Scheme Description'.

We do not accept that a CHP station exports its electricity to the grid where it has no physical ability to export its electricity at all. Where the station cannot export any of its electricity the operator should notify Ofgem or NIAUR of the fact and adopt the simplified arrangements set out at section 5 of this notice, which remove the need for the operator to obtain and allocate CHP LECs.

Where a CHP station has some export capacity, HMRC accepts it can supply GQCHP source electricity together with the associated LECs up to the limit of that physical capacity. Any remaining CHP LECs should be allocated against the operator’s self supplies or to its direct supplies to electricity consumers.

8.4 Supplies of GQCHP source electricity

For electricity to qualify as GQCHP source electricity, you must:

  • generate or acquire sufficient GQCHP source electricity with associated LECs to meet the balancing period requirements
  • allocate the electricity to a supply under the terms of a CHP contract, and
  • notify Ofgem or NIAUR of the allocation of the LECs, quoting the relevant LEC identifiers.

The holding of a CHP LEC does not in itself provide exemption from CCL. Supplies of GQCHP source electricity must be the subject of a CHP declaration and supplied for consumption within the UK. Such supplies are only exempt from CCL where the electricity was generated before 1 April 2013 and the supply by the utility to the consumer is made before 1 April 2018.

8.5 Notification to Ofgem or NIAUR

The transfer and allocation of a CHP LEC is monitored to ensure it is notified only by those entitled to do so. Electricity utilities are therefore required to notify Ofgem/NIAUR on a monthly basis of electricity supplied under the terms of a CHP contract, and of the relevant CHP LEC reference numbers.

Further information on the administration of CHP LECs can be found on the Ofgem and NIAUR websites.

Budget 2011 announced that GQCHP electricity produced on or after 1 April 2013 that is supplied to an energy consumer by an electricity utility would no longer benefit from a discrete exemption from CCL (“the CCL CHP indirect supplies exemption”).

Ofgem and the NIAUR will not issue CHP LECs in respect of the GQCHP electricity that is produced in either a fully exempt CHP or a partly exempt CHP on or after 1 April 2013.

However, where electricity utilities have unredeemed LECs in relation to GQCHP electricity produced and acquired before that date, they will be able to continue to allocate those LECs (notifying Ofgem/NIAUR accordingly) until that stockpile is exhausted or until 31 March 2018, whichever happens sooner. From 1 April 2018, Electricity utilities will have to start accounting for CCL on supplies to business and public sector consumers.

9.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 he produces is primarily for his 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 he makes;


(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 him in that period.


Balancing and averaging periods


The method by which persons making exempt indirect supplies match such supplies with the acquisition of GQCHP source electricity. See section 7.


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 contract


The contract between an electricity utility and a consumer for the sale of CHP generated electricity.


CHP declaration


A declaration by the person making exempt indirect supplies that he will, in each averaging period, acquire or generate at least as much GQCHP source electricity as the electricity he supplies exempt from CCL under CHP contracts.


CHP levy exemption certificate (LEC)


A certificate that Qualifying Power Output electricity has been produced in a fully exempt or a partly exempt CHP station.


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


DECC


Department of Energy and Climate Change.


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 via the distribution system of a licensed electricity distributor, provided no one else takes ownership of the electricity.


Electricity utility


The holder of:


  • a licence under section 6(1)(d) of the Electricity Act 1989 (supply licences), or
  • 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 HM Revenue and Customs 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.


GQCHP source electricity


Electricity purchased or sold as representing QPO electricity.


Indirect supplies


Supplies falling under the provisions made by Finance Act 2000, Schedule 6 paragraph 20A(1) (exemption for supply made by electricity utility of CHP electricity). Such supplies are only exempt from CCL where the electricity was generated before 1 April 2013 and the supply by the utility to the consumer is made before 1 April 2018 at the latest.


LEC


Levy exemption certificate – see CHP levy exemption certificate (LEC).


Licensed supplier


The holder of:


  • a licence under section 6(1)(d) of the Electricity Act 1989 (supply licences) or,
  • 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.


Non-exporting stations


A CHP station where none of the electricity produced is supplied to an end-consumer via someone other than itself.


NIAUR


Northern Ireland Authority for Utility Regulation.


Ofgem


The Office of Gas and Electricity Markets.


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 is 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.


Relevant Authority


The Office of Gas and Electricity Markets (Ofgem) or, in relation to electricity produced or supplied in Northern Ireland or produced in the Republic of Ireland, the Northern Ireland Authority for Utility Regulation (NIAUR).


Renewable source electricity levy exemption certificate (LEC)


A certificate that a quantity of electricity constitutes renewable source electricity for the purposes of the levy.


RSE


Renewable source electricity.


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, i.e.:


  • 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, or
  • 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

Your Charter explains what you can expect from us and what we expect from you. For more information go to Your Charter.

Do you have any comments or suggestions?

If you have any comments or suggestions to make about this notice, please write to:

HM Revenue & Customs
Environmental Taxes Team
3rd Floor West, Ralli Quays
3 Stanley Street
Salford
M60 9LA

Please note this address is not for general enquiries.

For your general enquiries please phone our Helpline 0300 200 3700.

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.

If you want to know more about making a complaint go to www.hmrc.gov.uk and under quick links, select Complaints and appeals.

How we use your information

HM Revenue & Customs is a Data Controller under the Data Protection Act 1998. We hold information for the purposes specified in our notification to the Information Commissioner, including the assessment and collection of tax and duties, the payment of benefits and the prevention and detection of crime, and may use this information for any of them.

We may get information about you from others, or we may give information to them. If we do, it will only be as the law permits to:

  • check the accuracy of information
  • prevent or detect crime
  • protect public funds.

We may check information we receive about you with what is already in our records. This can include information provided by you, as well as by others, such as other government departments or agencies and overseas tax and customs authorities. We will not give information to anyone outside HM Revenue & Customs unless the law permits us to do so. For more information go to www.hmrc.gov.uk and look for Data Protection Act within the Search facility.

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$START-DATA$ title=Combined heat and power schemes^ summary=Provides information on the treatment for CCL purposes of CHP schemes assessed under the CHPQA programme.^ doctype=PublicNotice^ date=26-Feb-2014^ author=lk125388^ $END-DATA$
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