A short guide to the Energy Intensive Industries compensation scheme

This guide was last updated on 31/05/2022

In April 2022, the government announced it would extend the Energy Intensive Industries (EII) compensation scheme for a further three years.

We’ve put together an easy explainer on the scheme, to help you understand the basics, and whether you qualify.

What is the Energy Intensive Industries (EII) compensation scheme?

The EII compensation scheme is a UK government initiative intended to help energy-intensive industries stay competitive as our economy transitions to zero carbon. It’s also known as the EII exemption scheme.

The scheme provides businesses with relief for the costs of the UK Emissions Trading Scheme (ETS) and Carbon Price Support mechanism in their electricity bills, recognising that UK industrial electricity prices are higher than those of other countries.

When did the EII compensation scheme come in?

The EII compensation scheme was first launched in 2016, and allowed businesses in certain sectors to apply for relief from the costs they had already paid. Compensation was capped at 85% of the costs, because of EU State Aid rules.

In autumn 2017 the scheme moved from compensation to exemption, to give energy-intensive industries more long-term certainty and bigger cost savings.

In April 2022, the government announced that it would be extending the scheme for a further three years.

Why is the government extending the EII compensation scheme?

The government has reviewed the evidence and believes that there continues to be a risk of carbon leakage due to indirect emission costs for some sectors. There is a risk that the indirect emission costs found in the electricity price could lead to the displacement of production, and associated greenhouse gas emissions that would not have happened if climate rules and policies across jurisdictions were implemented in the same way.

How long will the EII compensation scheme be extended for?

The government has committed to extend the EII compensation scheme for a further three years to 31 Mar 2025, with payments backdated to 1 Apr 2022. It is also increasing the percentage of indirect emission costs which the government is compensating for when compared with the current scheme.

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.

What is an energy-intensive industry?

Sectors count as energy intensive if they carry out certain specified activities. The list of eligible activities specified in the government guidance is extensive and includes aluminium production, leather tanning and glass manufacturing. It also includes the manufacture of things as diverse as wallpaper, tyres and electronic components.

Does every EII qualify for the exemption?

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 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.

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 a business qualify for the EII exemption scheme if it has a mix of activities?

If some of your activities are on the approved list, you can still apply for an EII exemption certificate even if other activities do not count as energy intensive. However, the exemption that you receive will only be in proportion to the electricity used for approved activities. For example, if your business manufactures and sells carpets, you will only be exempt from costs relating to the manufacture side of your business, not the retail side.

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