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The Climate Change Levy is here to stay. Although it means higher prices for electricity, it includes incentives that if taken advantage of, will see companies saving money, not spending more. The Enhanced Capital Allowances will give users of variable speed drives, energy efficient motors and other pieces of energy saving equipment what essentially is a discount on the purchase cost. James Haigh, ABB explains how much you can save, how it works and how you go about claiming. A tax which saves you money? That's the unlikely outcome of the government's new environmental legislation. Known as the Climate Change Levy, it is designed to control global warming by cutting the amount of CO2 released into the atmosphere. The biggest culprit is electricity production - and, as all industry uses electricity and so contributes their share of CO2, under the principle of the polluter pays, all industrial users must pay a levy on its use. This means higher electricity bills. Yet, the CCL is not meant as a punitive tax - it is intended as an incentive to change to more energy efficient technologies. The money saving incentive part of the levy comes in the form of Enhanced Capital Allowances (ECAs), which allow companies to deduct the full cost of the investment against corporation tax. Compared to the usual scheme of things, ECAs, have two distinct advantages: · They increases value of the tax benefit · It improves your cash flow - the ECA is equivalent to a rebate of between 6 and 15 percent. ECAs can be used for a list of energy saving technologies, including motors and variable speed drives. The list of motors includes:- all 2 and 4 pole motors between 1.1 - 90kW that meet the CEMEP EFF1 efficiency ratings; and all 2 and 4 pole motors between 90 - 400kW and 6 and 8 pole motors between 5.5 - 315kW that meet the Water Industry Motor Efficiency Standards (WIMES) requirements for 6 pole motors. Only drives in variable torque applications i.e. pumps and fans, are eligible for ECAs. This is because the savings are particularly large here. The scheme does not however apply to soft starters. If the drive or motor is part of a larger machine, only the part of the cost that relates to the drive or motor is eligible for ECAs. Installation costs for capital equipment are regarded as expenditure and so are also subject to ECAs. How much you can save Normally, the cost of capital goods is written off over a number of years, 25% per year on the decreasing balance. This means, that on a £10,000 investment, £2,500 is written off in the first year. Companies normally continue in this way for eight years, after which some 95% of the value has been written off. In contrast, ECAs enable users to offset the full cost in the year of purchase, reducing the tax burden and improving cash flow. What if £100,000 was invested, with Enhanced Capital Allowances, assuming 31% company tax? That £100,000 is written off in the first year. This means you can claim £31,000 tax back, £3,104 more than under the reducing balance scheme. As all this is done in the first year, you get £23,250 more back in this year, money that you can use in your business. This money will earn you between £1,200 and £1,900 per year for each of the eight years or a total of nearly £12,000 over the period. Compared to the old scheme, the Enhanced Capital Allowances will have saved you nearly £15,000, or 15% of the purchase cost. How does this affect the payback calculation for variable speed drives? Let's say that we have a pump in an air conditioning system. The 75kW pump motor is running continuously, 24 hours a day, at full speed and the flow is regulated with a valve; average flow is 50%. The motor will in this case consume 80% of the rated power, or 60kW, at a cost of £72 per day, or £26,280 per annum. Now we remove the valve and install a 75kW variable speed drive from ABB, costing £5,800. The flow is regulated by the speed of the motor, which is dropped down to 50%. The motor will not only run slower, but because it is not running against a restriction, it will also run more efficiently. So efficiently, in fact, that the power consumption will be just 40% of the rated power, or 30kW, at half the previous cost. The payback on energy alone is seven months. But because the ECA effectively means a 15% discount from the government, the payback time will be shortened by a month, to six months. Energy efficient motors are also eligible for ECAs. The resulting cost reduction could all but eliminate the price differential between high and standard efficiency motors, making energy efficient motors even more attractive. When purchasing a variable speed drive and/or motor, you can claim ECAs on the purchase cost, along with any capital costs spent on installation, transportation and alterations to buildings. If you buy a larger piece of equipment with a qualifying drive or motor already installed, the proportion of the cost that relates to the drive or motor will attract ECAs. The amount eligible for the claim is published on the government's web site, www.eca.gov.uk. Top of the page |
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