Electricity Generator Levy
Autumn Statement 2022

The government has announced the introduction of a new levy on excess profits produced by electricity generators (the “Levy”). The Levy will come into effect from 1 January 2023 and will be legislated to end by 31 March 2028, i.e., it is intended to be a temporary measure. The measure is expected to raise over £14 billion over the period and is part of a package of measures intended to fund the cost of £56 billion of support being provided to households and businesses to reduce their energy bills during the ongoing energy price crisis.

Scope

The Levy will apply to companies generating more than 100 GWh of electricity in the UK from nuclear, renewable and biomass sources, i.e. it is targeted at those forms of electricity generation which have seen a significant increase in the price received for their output without a corresponding increase in their costs. Battery storage, pumped storage hydroelectricity and fossil fuel generation are excluded from the scope of the Levy, as are projects that are party to a Contract for Difference (CfD) entered with the Low Carbon Contracts Company Ltd (LCCC). Today’s announcements do not appear to make reference to generation from Energy from Waste plants, but our expectation is that these assets are likely to be in scope.

The scope of the Levy covers electricity generated in the UK, both sold in the UK and exported. It will not apply to electricity generated outside of the UK and imported.

Joint ventures, which are particularly common for offshore wind projects, will unsurprisingly be included in the scope of the Levy, however the government have acknowledged that the application of the Levy to these structures requires further consideration, particularly with respect to offtake arrangements with the partners in the joint venture.

Tax rate and calculation

The Levy will apply at a rate of 45% to “Exceptional Generation Receipts”, which will be determined by reference to revenue from sales exceeding a benchmark price of £75 MWh (a level which the government has stated to be approximately 1.5 times the average price of electricity over the last decade).

This will result in a combined 70% tax rate on earnings over £75MWh.

A £10 million per year allowance will apply, such that Exceptional Generation Receipts below this threshold will be exempt.

The revenue to be taken into account for the purposes of calculating the Levy will be revenue received from output from in-scope generation in the relevant period from all potential routes to market, include power purchase agreements (“PPAs”), forward contract and trading on the wholesale market. The government has indicated that they expect this measure to closely align with the timing of revenue recognition for financial reporting purposes.

Revenue will take account of, or be adjusted for:

• Revenue from accepted balancing market offers;
• The net impact of imbalance settlement;
• Gains or losses on financial derivatives used to hedge output and/or group trading relating to output, e.g. buying back electricity in the market at a higher or lower price than output was previously sold.

Where a group sells its generation to third parties, revenue for the purposes of the Levy will be the third party revenue that members of a group receive for electricity generated in the UK, irrespective of whether the sale is made directly by the generating company, or by another member of the group. Where groups include both generation and supply in the UK, or in-scope and out-of-scope generation, it may be necessary to determine the relevant wholesale component of the receipts (potentially akin to creating a generation “ring-fence” similar to oil & gas companies).

Revenue that renewables generators earn from the sale of Renewables Obligation Certificates or revenue from capacity market payments is excluded.

It is not clear from today’s announcement that the definition of group for these purposes is limited to a UK group; therefore it is possible that the intention is for the Levy to also apply to sales of UK generated electricity by group trading companies located outside of the UK, raising a number of issues with respect to data-collection and potential double taxation.

The Levy will not be deductible from profits subject to corporation tax. The responsible company within a group will be required to return the amount of Levy due within its corporation tax return, and payments will be due in line with the responsible company’s normal corporation tax payment due dates.

Our view

A windfall tax on low-carbon renewable generators has been widely anticipated following the introduction of the Excess Profits Levy for upstream oil & gas companies in May 2022, and therefore today’s announcements are unlikely to be of surprise to industry. Similar proposals have been made by the EU and individual EU member states earlier this year.

The targeted nature of the measure, with only sales above the £75MWh benchmark price being subject to the Levy, will be welcome, and contrast with the position for oil & gas companies under the Energy Profits Levy. The clear exclusion of CfD projects, battery storage, pumped storage and fossil fuel generation will also be welcome. However, there will inevitably be some concerns as to potential complexities in respect of calculating the levy where electricity is sold intra-group (particularly cross-border); whether the benchmark price has been set at the right level (there is no indication this will be increased for inflation across the period the level is in force; the potential impact on investment in future renewable projects (particularly projects that would typically take market price risk); and the risk that a temporary measure becomes a permanent one.

There are many important points of detail that will become clear when draft legislation is published. HM Treasury and HMRC have indicated they will contact generators to discuss the Levy in due course, and no doubt industry will be keen to ensure that their views are heard.