With recent changes to how Emissions Trading Scheme (ETS) and Carbon Price Support (CPS) compensation is calculated, this could have huge ramifications for UK aluminium. To help inform their members, ALFED have put together a quick guide to the scheme, its recent changes, and what aluminium producers should do to take full advantage of the compensation available.

What is the compensation scheme, and who is eligible?

In 2021, the Department for Business and Trade (DBT) began offering manufacturing sectors with high electricity use financial compensation to offset the indirect costs attributed to the enactment of low-carbon schemes ETS and CPS.

The government recognised that carbon pricing through these mechanisms would have knock-on effects to the wholesale electricity price. This, in turn, would increase the risk of carbon leakage for the UK’s most electricity-intensive businesses, particularly those which operate in internationally competitive markets and are unable to pass these indirect emission costs through to consumers.

The government therefore began compensating electricity-intensive industries which were considered to be exposed to a significant risk of carbon leakage from the indirect emission costs of the UK ETS and CPS.

Aluminium production is one such sector which eligible for compensation, so long as applicants meet the “5% filter test” which, in a nutshell, only includes companies whose indirect carbon costs amount to 5% of more of their gross value added (GVA).

How has it changed?

It is important to note from the outset that the eligibility criteria to the scheme have not been affected (those who were previously eligible still are), however, the method by which the amount of compensation is calculated has been updated. This could result in significant cuts to the available payment for certain members of the aluminium industry.

More specifically, the change affects the compensation available to producers of unwrought aluminium alloys. Previously, these producers were eligible for a higher rate of relief which is now only available for primary aluminium. This means that previous recipients from the unwrought sector could now be losing out on millions of pounds from 1st April 2024 onwards.

The DBT has now released full details of how compensation is determined for unwrought aluminium producers, so current compensation recipients in this sector should prioritise calculating the new rate which takes affect in April, while those who have not yet applied can pre-calculate the compensation they will receive.

How can UK aluminium producers take full advantage of the compensation available?

As a niche energy-based compensation scheme that received very little fanfare, we’ve found from discussions with Aluminium Federation members that many companies within ALFED and from the wider UK aluminium industry were not even aware of the scheme.

Companies from across the sector, and indeed from other eligible industries like copper, leather and paper, should as a priority apply to the DBT for compensation. Even companies working with unwrought aluminium who were not previously receiving payments should apply – after all, even on a lower rate these companies will still be eligible for something, albeit less than before.

At the outset, the key steps for applying for compensation seem relatively simple. Primarily, ensuring that your company sits in one of the eligible sectors, then confirming you meet the 5% benchmark, which requires businesses to i) meet the 5% test on a mean average basis over the past five years, and ii) be above the 5% line for at least three of those five years.

There are however multiple steps that a company can take if they do not reach the above criteria, and a more nuanced approach is recommended to take full advantage of the compensation available. The lengthy supporting document comes to around 8,000 words and there are in fact a variety of scenarios where claims have been made for organisations that do not meet those conditions.

Companies looking to claim compensation should seek advice from industry consultants like Leyton, who can provide guidance on navigating this complex set of criteria.