A guide to the EII Renewable Levy Exemption Scheme & EII Compensation Scheme

Two separate but similar government schemes are available to help Energy Intensive Industries (EIIs) stay competitive as our economy transitions to net zero by 2050 and keep the UK as an attractive option for energy intensive investors (especially with new fossil fuel alternative technologies e.g. batteries manufacturing):

1. The EII Exemption Scheme – which exempts businesses from the indirect costs of funding renewable energy policies.
2. The EII Compensation Scheme – which compensates businesses for the indirect costs of the UK Emissions Trading Scheme (UK ETS) and Carbon Price Support mechanism (CPS).

We’ve put together a short guide to help you understand the basics of the schemes, and whether you qualify.

1. The Energy Intensive Industries Exemption Scheme

What is the EII Exemption Scheme?

The EII Exemption Scheme provides energy intensive businesses with relief for the indirect costs of the Contracts for Difference (CfD), Renewable Obligation (RO) and Feed in Tariff (FIT) schemes. These schemes were developed to increase renewable and low carbon electricity generation in the UK, but the costs of funding them are recovered through levies or an obligation on suppliers. These are ultimately passed on to consumers’ electricity bills. The government recognises that the resulting increase in retail electricity prices risks putting some electricity-intensive businesses at a significant competitive disadvantage when they are operating in international markets. The EII Exemption Scheme was brought in to address this risk and prevent “carbon leakage” – whereby companies move their production to countries with less stringent climate policies.

How much exemption do businesses receive?

Currently, the EII Exemption Scheme provides a discount of up to 85% of the indirect costs of the CfD, RO and FIT schemes. However, in light of the energy crisis, the UK government is consulting on increasing the subsidy intensity of the EII Exemption Scheme from 85% up to 100%. UK industrial electricity prices are higher than those of other countries including in Europe.

How does EII Exemption work?

A business that successfully applies for the exemption will be issued with an “EII certificate” confirming their eligibility for the CfD, RO and FIT exemption. Successful applicants should then pass their certificate on to their electricity supplier so that they receive the benefit of the exemption. Companies will need to re-apply annually to receive exemption.

How do I apply for EII Exemption?

You will need to fill in the application forms, provided by Department for Business & Industrial Strategy (BEIS) – you can find them on the government website.

Is my business eligible for the EII Exemption Scheme?

There are five key requirements in determining whether a business is eligible for an EII certificate:

1. The “sector level test”: Businesses must manufacture a product in the UK that falls within one or more of the eligible 4-digit NACE codes. There is a list of eligible codes in the government’s official guidance, covering a wide range of quarrying, mining and manufacturing activities.
2. The “business level test”: The business must pass a 20% electricity intensity test – i.e., they will need to show that their electricity costs amount to 20% or more of their Gross Value Added (GVA).
3. The business must not be an “Ailing or Insolvent Economic Actor” (AIEA) – generally defined as a business that would almost certainly out of business in the short to medium term without a subsidy.
4. The business must have at least two quarters of financial data.
5. The application must contain evidence of the proportion of electricity used to manufacture the product for a period of at least three months.

Is the EII Exemption Scheme available in Northern Ireland? The CfD, RO and FIT Exemption Schemes do not apply to Northern Ireland (the Northern Ireland Executive has just consulted on a future scheme). However, companies based solely in Northern Ireland can currently apply for RO compensation – official guidance is on the government website.

Is my business eligible for the EII Exemption scheme if it has a mix of activities?

Yes, but the exemption only applies to the electricity associated with manufacturing eligible products. If your business is manufacturing both eligible and ineligible products, you will need to isolate the electricity usage associated with the eligible product – and provide evidence, for example, in the form of metered records. If this isn’t possible you can estimate the electricity usage associated with the manufacture of an eligible product using the proportion of the different products being made (in tonnage, m2 or another justified metric). For example, electricity consumption is allocated to a product in the same proportion as the tonnage of the product produced relative to overall tonnage.

2. The Energy Intensive Industries Compensation Scheme

What is the EII Compensation Scheme?

The EII compensation scheme provides energy intensive businesses with relief for the indirect costs of the UK Emissions Trading Scheme and Carbon Price Support mechanism in their electricity bill. It is a long running scheme; compensation for EU/UK ETS costs was introduced in 2013, and CPS compensation was introduced in 2014. As with the Exemption Scheme, the Compensation Scheme aims to help businesses stay competitive globally and prevent carbon leakage.

Has the government extended the EII Compensation Scheme?

Yes. In April 2022, the government announced that it would be extending the scheme for a further three years, until 31 March 2025. It follows a review of evidence which shows that there continues to be a risk of carbon leakage for some sectors. Payments will be backdated to 1 April 2022. The government has also increased the percentage of indirect emission costs which will be compensated for.

Are there new requirements in this phase of the EII Compensation Scheme?

Yes. All recipients of compensation are now required to submit a plan by the end of the first year of the scheme (March 2023) setting out their decarbonisation pathway and how this supports the UK’s net zero target. Given that this is a new condition, the government says it will not require recipients to meet specific targets nor enforce this requirement in a way that would result in a deduction to or recovery of compensation. However, it is likely to set more rigorous conditions in the future. For example, the obligation to implement recommendations of audit reports for recipients that are subject to the Energy Savings Opportunity Scheme (ESOS) or reduce the carbon footprint of their electricity consumption. Any stricter conditions would be applied no earlier than the 2023 scheme year. Or, the increased requirement of Task Force on Climate-Related Reporting TCFD (TCFD) on companies and the need to demonstrate a businesses journey and resilience in net zero transitions; to investors and public.

How much compensation can my business get?

Subsidy intensity will limit a company’s total indirect emission costs to 1.5% of their GVA or 75% of their total indirect emissions costs, whichever is greater in the respective years for the period April 2022 to March 2025. However, the government has set an overall budget limit for the scheme and if there is a risk of budget over-spend, they may choose to reduce the subsidy intensity.

Does every energy-intensive industry qualify for compensation?

Only certain sectors are eligible. First, applicants need to establish that they manufacture a product which falls within one of the eligible 4-digit SIC codes (you can find these in the official government guide). A few sectors were omitted from the scheme at the last update. These were: mining of iron ore, chemical and fertiliser minerals, manufacture of plastics in primary forms, and manufacture of man-made fibres. A few sectors were added too: manufacture of veneer sheets, wood-based panels, glass fibres, batteries and accumulators. Firms will also have to pass a “business level test,” which includes showing that their indirect carbon costs amount to 5% or more of their GVA. Initially, a firm’s level of compensation will be determined initially using the most recent 5- year period of historic data, and firms have the option to exclude FY 20/21 and 21/22 from their baseline to account for the impacts of the Covid-19 pandemic.

How does my business apply for EII compensation?

Details of how to apply are included in the government guide. There are spreadsheets to help you calculate what costs your business may be exempt from.

Does my business qualify for the EII Compensation Scheme if it has a mix of activities?

Yes, but as with the Exemption Scheme, compensation will only be due for the electricity associated with the manufacture of eligible products. Where an installation is manufacturing both eligible and ineligible products the business will need to identify the electricity usage associated with the eligible product using one of the following methods:

• provide evidence which clearly demonstrates the proportion of their electricity usage associated with the manufacture of the product in question – preferably, in the form of sub-metered records
• base the electricity usage associated with the manufacture of an eligible product on the amount of that product being made (in tonnage) as a proportion of total production of all products

Does the EII Compensation Scheme apply in Northern Ireland?

EIIs in Northern Ireland are not eligible for the UK ETS compensation scheme at this point in time. If compensation is to be introduced in the future, this will be in the form of a separate scheme designed in accordance with Article 10 of the Northern Ireland Protocol. The CPS does not apply to Northern Ireland and therefore firms in Northern Ireland are not exposed to its indirect costs.