Rates Relief Essential To Keeping The Lights On

The Government must provide rates relief for gas plants mothballed because of weak spark spreads – or risk deepening the looming capacity shortage, says Gerald Eve’s Keith Norman.
This spring, Alistair Buchanan, chief executive of Ofgem, confirmed what the energy sector has been warning of for some time: the UK is facing a capacity shortage. A mixture of renewables, nuclear and clean coal has the potential to offer a secure, low-carbon future, but not until 2030 at the earliest. The prospects for the intervening period are in the balance.

Ten per cent of our current generation stock will decommission shortly, either due to emissions legislation (non-compliant coal-fired plant) or on the basis that it is no longer economic to operate (oil-fired facilities). In addition to this there is gas-fired plant currently in a temporary or deep mothballed state, because current spark spreads cannot justify their operation. If gas-fired generation is to fill the gap, then such plants will soon have to come back online.

Business rates are a major fixed cost for mothballed or redundant power plants. To a certain extent, they are within the operator’s control – they could demolish the plant – but given the looming capacity shortage, it seems perverse to incentivise the destruction of existing facilities. Business rates are a well-established and generally well-understood property tax, but they sometimes fail to align with wider policy issues. In the case of gas plant, it is a disparity that needs to be addressed sooner rather than later.

The business rates issue has its foundations in the government’s removal of empty rate relief in 2008, introducing a liability on vacant properties, a liability that became known as the “Bombsite Britain Tax” on the grounds that it incentivised the demolition of empty properties. As a result, redundant and temporarily mothballed power stations attract a business rate liability unless they cannot be legally operated (for example, non-compliant plants which have used up their operating hours). The only certain route to avoid a substantial ongoing liability is demolition.

Ofgem must encourage the government to take another look at this issue. If there is a serious political will to address the capacity shortage, it must make sense to introduce relief on plant that is not generating (both short and long-term) to ensure that capacity is not permanently lost.

Business rates were to be re-evaluated in 2015. The purpose of a business rates revaluation is to redistribute the rate burden according to the relative performance of different sectors. Gas-fired plants therefore stood a chance of benefiting. However, the government is deferring this revaluation until 2017, removing a potential light at the end of the tunnel for gas-fired generators.

Given this delay, it is even more important that a co-ordinated, UK-wide business rates relief scheme is introduced for plant removed from service for economic reasons. Not only would this support the requirement to retain capacity in the market capable of delivering baseload generation, it would remove the urgency to make a decision regarding the demolition or dismantling of plant where parts could be retained for future redevelopment (such as carbon capture and storage).

The UK is moving towards a low-carbon generation future, and business rates policy is to an extent moving with this. For example, local authorities will be able to retain all business rates income associated with new renewable energy plant commissioned after April 2013, providing clear fiscal incentives for local authority stakeholders to support the development of renewable plant. However, the system needs to be aligned with the current economic difficulties faced by gas-fired generation if the capacity shortage of which Buchanan is so wary is to be avoided.

Keith Norman is a partner and head of the energy team at Gerald Eve.

This article first appeared in the 14th June edition of Utility Week. You can view the original article here.