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HM Revenue and Customs Brief 22/11


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Issued: 13 June 2011

Climate Change Levy: acquisition of electricity from a combined heat and power station

Purpose of this brief

This brief clarifies the Climate Change Levy (CCL) guidance in the Notice CCL1/2 Combined heat and power schemes which deals with the circumstances in which electricity from a Combined Heat and Power (CHP) station can be acquired by an electricity utility.

Notice CCL1/2 Combined heat and power schemes can be found on the HM Revenue & Customs (HMRC) website and will be updated later this year.

Who needs to read this?

Operators of CHP stations and electricity utilities wishing to acquire electricity produced in CHP stations.


The supply of Qualifying Power Output (QPO) electricity generated from 'good quality' CHP is exempt from CCL when supplied to the final consumer by an electricity utility under the terms of a CHP source contract that contains a CHP source declaration given by the supplier. In this brief HMRC refer to QPO electricity as Good Quality (GQCHP) source electricity.

A 'CHP source declaration' means a declaration that, in each averaging period (see below), the amount of electricity supplied exempt from CCL on the basis that it is Good Quality CHP (GQCHP) source electricity will not exceed the amount of GQCHP source electricity acquired.

Electricity produced in a CHP station that is assessed as good quality under the CHPQA programme and holds a Secretary of State CCL exemption certificate is classed as GQCHP source electricity for the purposes of the CCL exemption. Electricity generated that is not produced from 'good quality' CHP is not classed as GQCHP source electricity and does not qualify for the CCL exemption.

Once electricity enters the national grid the technology used to generate it is no longer distinguishable so GQCHP levy exemption certificates (CHP LECs) are used to evidence electricity that has been produced via 'good quality' CHP. LECs are issued on a monthly basis to electricity generators by the Northern Ireland Authority for Utility Regulation (NIAUR) (for electricity generated in Ireland or Northern Ireland) or the Office of Gas and Electricity Markets (Ofgem) (for electricity generated elsewhere). Generators of GQCHP source electricity need to be registered with these authorities in order to obtain CHP LECs. One LEC is provided for each complete megawatt hour of electricity produced from a qualifying CHP station which is consumed, or to be consumed, in the UK. LECs issued by Ofgem are electronic certificates, each having their own unique identifier. LECs issued by NIAUR are paper documents.

The LEC passes down the supply chain until the final supply of electricity is made to an end user liable to pay CCL. Possession of the LEC assists the electricity supplier in demonstrating that the electricity it has supplied as exempt is matched by equivalent amounts of qualifying generation. The supplier must notify Ofgem or NIAUR, as appropriate, that the LEC has been used.

The calculation carried out by utilities to match amounts of electricity supplied exempt from CCL with equivalent amounts of GQCHP source electricity acquired is known as balancing and averaging. If, at the end of an averaging period (which can run for a maximum of two years), there is a shortfall between the amount of GQCHP source electricity acquired and the amount supplied exempt from CCL, the utility is liable to pay CCL on the difference. Where acquisition exceeds supply, the excess is carried forward as a credit to the next balancing and averaging period.

HMRC generally accepts 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.

Sell and buy back arrangements

Sometimes CHP operators and electricity utilities 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
  • the purchase by the CHP operator from the utility of non-GQCHP source electricity

Where such sell and buy back arrangements exist, the utility 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 HMRC 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)
  • the quantities of GQCHP source electricity supplied do not exceed the stationís export capacity determined by the export metering information supplied on the relevant CHPQA form - 'Form F2 - CHP Scheme Description'

HMRC does 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 the NIAUR of the fact and adopt the simplified arrangements set out at chapter 6 of Notice CCL 1/2 Combined heat and power schemes, which removes 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 operatorís self supplies or to its direct supplies to electricity consumers.

Further information can be obtained from the HMRC website or by phoning the Excise and Customs Helpline on Tel 0845 010 9000.

About the Author

© Crown Copyright 2011.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.

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Article Published/Sorted/Amended on Scopulus 2011-06-14 17:46:32 in Tax Articles

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