Thursday, 15 December 2011

Budget 2012 – Good for Bioenergy?

Despite the general wielding of the axe to public expenditure, the 2012 budget was fairly positive for the bioenergy sector. For starters, the VAT rate on energy remained at 13.5%, whereas all items charged at the Standard rate experience a defacto 2% price hike.

Mainly due to lobbying of the Irish Bioenergy Association and its members, a VAT anomaly that unfairly penalised district heating was adjusted. Prior to the budget, Revenue had issued an opinion that the sale of hot water was at the Standard rate, but a welcome announcement in the budget was to reduce this to the 13.5% rate.

The cost to the exchequer of this measure is minimal as to-date, district heating, which is widely adopted in continental Europe is non-existent in Ireland (with some notable exceptions).

This announcement effectively reduces the cost of district heating to potential end users and levels the playing field in terms of choosing their method of heat supply. District heating is closely associated with biomass heating, as it allows multiple consumers to take advantage of lower cost fuel, while also dividing the high initial costs of installing biomass technology.

A surprising aspect of this announcement is that Revenue communicated during the year that it would be contravening EU tax harmonisation agreements to reduce the VAT rate on district heating.

Carbon taxation
Carbon tax, vociferously opposed by farmers and road users alike, is a blunt but highly effective instrument in gradually shifting consumers to renewable fuels, such as wood chip, wood pellets or transport biofuels.

The carbon tax was increased from €15 to €20 per tonne of CO2 equivalent in the budget. The net effect of this was to add 1% to the cost of petrol and auto-diesel and almost 2% to home heating oils and natural gas. Biomass fuels are exempt from carbon tax as they are CO2 neutral (although this status was achieved for biofuels only after previous lobbying efforts!). The result is to improve the competitiveness of biofuels compared with fossil fuels. However the most carbon intensive fossil fuels – Coal and peat did not have increases in carbon tax. Meanwhile we may also note that the carbon tax in Sweden is currently €90/t of CO2 equivalent.

Energy crop establishment grants
Bioenergy crop grants were suspended during 2011 but their renewal was announced by the Department of Agriculture with €1.6m set aside to allow 50% funding contribution to farmers ready to invest in energy crops. This will facilitate the planting of up to 1,400 ha of energy crops, although farmers now have only until the 18th January to make a decision to plant next year. 

IrBEA and its members have communicated extensively with government departments on this topic and believe the industry needs to see a multi-year commitment in place to give investor confidence and stability to the sector. On the power generation side, it has been necessary to put guaranteed feed in tariffs in place for 15 years to allow projects to proceed. A major issue facing any Bioenergy project now is confidence in new sources of supply (such as energy crops) coming on line to provide a competitive and secure feedstock.
The crop establishment grant is welcome, but there are a number of other policy changes required to get 1,400 ha per year planted, never mind the minimum 10,000 ha/year that need to be planted to supply all the projected biomass required by 2020 to meet national renewable energy targets.

Forestry
Forestry escaped relatively unscathed in the budget, with a budget of €112m, similar to 2011. This will support planting of up to 7,000 ha/year. This falls well shy of the national afforestation target of 15,000 ha/year, but the reality is that even with budget in place these levels would not be achieved. The roads scheme has also been maintained, which is critical for forest thinnings to be made available to Bioenergy projects and other fibre users.

Extension of corporate tax relief
A revenue scheme to provide tax relief on up to €1m per project of external capital has been extended for three years. Again this is something the Irish Bioenergy Association made representations to the Department of Finance on during the year. At the standard corporate tax rate, effectively up to €125,000 can be deducted from an investors corporation tax bill. 

Although businesses generating corporate profits above €1m may be few these days, especially those investing in renewable energy, several wind farms and at least one Bioenergy project availed of this relief over the last number of years. The estimated cost to the exchequer is modest at €1m but can free up some capital to invest in renewable energy.

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