Changes to UK electricity generator levy welcomed

Out-Law News | 28 Dec 2022 | 3:41 pm | 2 min. read

New draft legislation for the UK’s electricity generator levy (EGL) contains some substantive changes from the policy that was first announced in November, according to one legal expert.

Jake Landman of Pinsent Masons said the draft legislation would “largely be welcomed” by industry stakeholders, who had previously warned that the levy could stifle innovation and impact plans for new renewables projects. “All the same, investors in renewable energy projects should pay close attention to the progress of this legislation and will need to review their investments in light of the changes it contains,” he added.

Last month, the Treasury said electricity generators, such as those generating electricity from nuclear and renewables sources, have realised “extraordinary returns” because they have been able to sell their energy at a price that reflects the cost of wholesale gas, and not the lower costs entailed with their operations.

It said that the levy, a 45% tax on low-carbon electricity generators, would be legislated for in the next Finance Bill, and would apply to extraordinary returns arising from 1 January 2023. The levy will be legislated to end by 31 March 2028, the Treasury added. But draft legislation published last week included several changes to the policy since it was announced in the chancellor’s autumn statement.

Landman Jake

Jake Landman

Partner

Investors in renewable energy projects should pay close attention to the progress of this legislation and will need to review their investments in light of the changes it contains

According to the draft legislation, the generation threshold has been reduced from 100GwH/year to 50 GwH/year. Landman said the change was likely because the £10 million allowance used to calculate exceptional generation receipts and the previous qualifying threshold for the levy of 100GwH/year would often coincide. This would perhaps have created an incentive for small generators to keep their generation below 100GwH/year. However, with the threshold at 50GwH/year a generator could go above this and still potentially not have chargeable generation receipts as a result of the £10m allowance..

At the same time, the benchmark price, which had previously been stated to be £75 per MwH, will only remain at that level until April 2024, when it will be adjusted by reference to the consumer price index (CPI). Landman said: “The proposed indexation will be very welcome in the industry. With inflation as high as it is, this policy should reduce the levy’s burden on generators – or at least prevent it from increasing too quickly. However, confirmation that other limits within the EGL, such as the £10m allowance, will not be indexed according to inflation does mean that the tax base will potentially increase over the life of the tax.”

The draft legislation introduces ‘allowable costs’ for the increased costs of generation fuels; revenue sharing for access to sites like landfill; and costs for buying back electricity from the grid to replace contracted output that is not generated. “This change constitutes a U-turn for the Treasury, since the chancellor said in November that the levy would not provide allowances for the increased cost of fuel to generate the electricity,” Landman said.

The draft legislation also includes new details on how the tax will apply to joint ventures and groups, and a clarification on the practical consequences of paying the levy. Companies in quarterly instalment payment regimes will not need to pay any of the tax until the Finance Bill has actually become law. A new targeted anti-avoidance rule will allow HM Revenue and Customs, or the company, to counteract any arrangements to avoid paying the levy by making adjustments to tax assessments or claims.

Landman said: “The draft legislation provides a great deal of much-needed clarity for businesses on the scope and application of the levy. There are still, however, questions the government needs to answer, such as how qualifying joint ventures will be treated, and which method will be used for appointing representative members for groups. More details are set to be provided in guidance that will be published next year.”

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