The government has not gone far enough to stop companies from accessing ‘double subsidy’ that allows them to undercut more beneficial technology in the Capacity Market, according to a report produced by Ecuity for UK Power Reserve.
The government has tried to exclude investment vehicles that get tax relief from the Capacity Market, arguing that this, alongside CM payments, over-rewards them. The issue is of concern because such investment vehicles have been used to invest in fleets of diesel engines that have been able to bid at low prices into the CM. That keeps the CM price below the level that will support investment in new flexible gas turbines and other new technologies.
The report argues that under current proposals companies can take advantage of a loophole by using part debt and part equity investment. “The only way to completely prevent distortion … is complete exclusion of projects that benefit from tax incentive scheme funding,” says Ecuity.
Download the report from UK Power Reserve here
From 27 September
The Department for Business, Energy and Industrial Strategy has changed its approach to avoiding ‘over-rewarding’ businesses that have used enterprise investment tax relief schemes as well as bidding for Capacity Market contracts.
At issues are projects supported by the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and Venture Capital Trusts.The government was hit by opposition to such schemes when it was revealed that many were ‘car park’ arrays of diesel generators.
On 30 November 2015 the government excluded such schemes from also receiving Capacity Market contracts. But it has struggled to decide how best to ensure projects that use funds raised before that date do not receive double benefits.
Initially, it proposed to exclude capacity that had used investment through risk finance schemes from CM auctions. But now it acknowledges that “An outright exclusion may create risks to auction liquidity and create a new barrier to companies and investors who have already taken investment decisions in good faith”.
Instead, it proposes to offset investment received through risk finance schemes, and spent on prospective capacity, from capacity payments (secured from future CM auctions) so that the total support received for that project is capped at the CM auction price.
The Department wants to make the change in time for the CM auction due to be held in December. It is consulting on the revised proposal and on legal text for the necessary amendments and has asked for comments within a month by 21 October.
Further reading
As air quality concerns grow, should we give tax breaks to diesel?