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Implications to U.S. Wood Pellet Markets from UK Scaling Back Renewable Energy Subsidies

The Forisk team summarizes the potential impact of the UK’s decision to no longer exclude renewable electricity from the Climate Change Levy (CCL) on U.S. wood pellet producers.

Summary of Levy Exemption Certificates (LECs)

The UK applies a tax called the Climate Change Levy (CCL) on UK business energy use (i.e. “non-domestic users” of energy).  Uses include electricity, gas, petroleum products and solid fuel.  Energy providers add the CCL charge to bills sent to business users.  “Exemptions” to the CCL exist.  For example, until recently, electricity produced from designated renewable sources was exempt.  These sources of electricity are entitled to “Levy Exemption Certificates” (LECs), which get bundled with the power by generators when sold to suppliers, and represent a source of revenue for renewable energy generators.

On July 8, 2015, the UK government announced its intent to remove the CCL exemption for renewable electricity. As a result, renewable energy generators in the UK will lose the revenue previously associated with LECs.

Implications for Wood Pellet Producers

What are potential implications for wood pellet producers in the U.S.?  Well, there are a few steps in between.  The direct effect to power generators in the UK would be approximately an 11% reduction in the total value of incentives applied to wood pellet power [Math: as of June 2015, total incentives include 42.22 £/MWhe (Renewables Obligation Certificate (ROC) price) plus 5.41 £/MWhe (LEC price) for a total of 47.85.  Eliminating LECs reduces the total incentive by 11%.]

Overall, incentives remain critical to making wood pellet-based power cost competitive with coal or natural gas.  However, the price of ROCs and applied carbon costs (i.e. UK Carbon Price Support (a tax) and EU ETS (emissions price; another tax)) remain far more critical in both volume and magnitude.  ROC prices are eight times greater than LECs. Bottom line: the loss of LEC revenue will hurt renewable power generators, but producing electricity from wood pellets is still favorable to fossil fuels as long as the other incentives (ROCs and/or CfD program (another incentive) and carbon costs) remain in place. The change will have little impact on wood pellet demand.

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