The global electricity market has seen a lot of movement during the past year – prices have risen due to the impact of increased demand for electricity post-Covid and the effect of Russia’s invasion of Ukraine on global gas supplies and prices. In the view of the UK Government, this has led to exceptional revenues being realised by some operators within the electricity market. In the wake of a rising cost of living and energy crises, these revenues will be subjected to a new Electricity Generator Levy (EGL). At the end of last year, the Government published the relevant draft legislation and a technical note on the operation of the EGL (https://www.gov.uk/government/publications/electricity-generator-levy).
Who will be affected by the EGL?
Applying from 1 January 2023, the EGL will apply to generators whose relevant generation output of electricity exceeds 50GWh across a period of a year. This will include electricity generated from nuclear, renewable energy, biomass, and energy from waste. Explicitly excluded are generating stations using the burning of oil, coal or natural gas, battery storage, hydrogen, as well as pumped hydro power plants, although hydro-electric plants that do not mainly rely on pumping water to a storage point are within scope.
A further exclusion applies to generating stations of any nature that operate under the Contract for Difference (CfD) regime or an investment contract under the Energy Act 2013, or where it is in receipt of feed-in tariff export payments. However, if there are parts that are being operated outside of these exceptions, these separate receipts will fall under the EGL’s scope. An example would be a solar farm that is combined with a battery storage site or if only parts of a wind farm’s capacity are covered by a CfD. Additionally, the exemption only applies once a CfD is in place, which means developers who were successful in last year’s CfD round are still affected until the CfD actually starts to apply.
Geographically, the EGL is restricted to generation within the UK, its territorial waters and within a Renewable Energy Zone as defined by the Energy Act 2004.
What counts as “exceptional receipts”?
Generation receipts will be calculated as: total receipts less ‘in scope’ generation multiplied by benchmark price – less allowable cost and an allowance of £10 million per annum.
‘In scope’ generation is anything that falls under the remit of the EGL as set out above. However, it has to be noted that this will include electricity exports, but not imports.
The benchmark price has been set at £75 per MWh for 2023 until April 2024 and will be linked in subsequent years to CPI for the year ended in the previous December. The justification for this is that according to the Government, this represents an average price above which returns can be considered exceptional. Any receipts below this level will not be subject to EGL.
The draft legislation provides for allowable costs to be deducted. These allowable costs are limited and cover the increased costs of generation fuels and buying back electricity from the grid to replace contracted output that has not been generated.
How will the levy be calculated?
The levy will be calculated as 45% of the group or company’s calculated revenue above the benchmark that exceeds an annual allowance of £10 million as set out above. The £10m is reduced proportionately where the qualifying period is less than 365 days.
One of the main difficulties here is who within a group of companies is liable to pay the EGL. The draft legislation defines a group by reference to a principal member, its 75% subsidiaries, and their 75% subsidiaries. It will be that principal member who becomes the default lead member responsible for paying the EGL on behalf of the group, although different arrangements can be made.
Special rules apply to Joint Ventures other than LLPs and Partnerships, in which there are five or fewer persons who between them hold 75% or more of the share capital (or are entitled to 75% or more of profits available for distribution to equity holders), but which are not a member of a 75% group of any shareholder. For these cases, the draft legislation sets out how generation receipts will be allocated when calculating the EGL. The reason for these detailed and complicated provisions is that otherwise EGL might be avoided by making use of the £10m allowance multiple times. The draft legislation explicitly contains an anti-avoidance provision.
Are there any adjustments?
The draft legislation provides for some adjustments to be made to what will count as exceptional revenue, albeit this is still subject to more detail being provided by HMRC.
So far, it has been detailed in the draft legislation and supplementary technical note that adjustments can be reasonable for:
- Gains or losses on financial instruments or arrangements that are intended to hedge the amount that a group realises for relevant generation.
- Payments or receipts under options or CfDs relating to relevant generation output eg payments that might need to be made under a virtual power purchase agreement entered into with a counterparty in respect of relevant generation output.
- Revenue from or (payments for) accepted balancing market offers, under which a generator agrees to increase its output.
- The net impact of the imbalance settlement.
Some revenue is also not considered relevant for the EGL calculation, such as:
- Revenue from or payments for accepted balancing market bids under which a generator agrees to reduce its output.
- Renewables Obligation Certificates or Renewable Energy Guarantees of Origin.
- Ofgem-regulated Feed-in Tariff generation and export tariff payments. Note that Feed-in Tariff sites that have opted to export on commercial terms will have such export revenue included.
- Payments not in connection with power provided to the grid, such as ancillary services.
- Capacity Market Payments in the few cases where renewable generators are eligible.
When and how will the EGL have to be paid?
At the moment, no payments are required to be made as the legislation the EGL will be based on is still in its draft stage and has not yet become law. Once in operation, it is intended to be administered through the corporation tax regime. The levy is expected to apply from January 2023 to 31 March 2028. It is expected that final legislation will come within the Government’s Spring Finance Bill.
What are the concerns?
The concerns for renewable energy generators are twofold – there are practical and political issues.
The announcement made by the Government to introduce the EGL has generally not been received well by the renewable energy industry. At a time of a global climate emergency when increasing the amount of renewable energy used and produced is crucial, they claim it sends the wrong signal to introduce a windfall tax on renewable generation. Some developers have said they will have to review their investment strategies. One developer has even announced an intention to initiate legal action if the Government does not scrap or reconsider the EGL (https://www.ft.com/content/8a5486a5-5375-4a8b-85cb-d60a58f480e4).
The Government, however, sees the levy as part of a package of measures to generate income to support households and businesses with the rising costs of living, including a cap on the amount charged for electricity. Another concern is that the EGL is higher than the equivalent that is charged for oil and gas revenue which raises the question of fairness and whether renewable energy generators might be put at a disadvantage.
In practical terms, the draft legislation and technical notes still leave a few questions unanswered: one issue is how will hybrid sites such as combined solar and battery storage projects be treated in terms of revenue. The supplementary technical note refers to further detail being provided in HMRC’s forthcoming guidance. Another issue is that while the benchmark price is index-linked, the £10m allowance is not, so it is possible for the tax base to increase even further over time. There also seems to be a mismatch between the draft legislation and the level of detail provided in the technical note, which does not deliver the certainty that is required. Another concern will be the impact of the introduction of the EGL on existing agreements and funding arrangements. The EGL will apply retrospectively from 1 January 2023 and has no clause limiting the application of the EGL to arrangements after that date.
Renewable energy generators will need to check whether they are considered to be within the scope of the EGL, particularly if they are part of a group of companies or Joint Ventures. If affected by the EGL, HMRC guidance should be reviewed to be able to estimate the financial impact of the EGL, once it has become law.
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