The UK Electricity Generator Levy
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Electricity Generation Levy Update.
The UK Government has now provided further detail on the Electricity Generator Levy (EGL) announced in the Autumn Statement 2022 (please see our previous commentary here). Just prior to Christmas draft legislation and accompanying explanations were released. The Government has also confirmed that the provisions in the Energy Prices Act 2022 for the Cost Plus Revenue Limit will not now be taken forward.
The fundamentals of the EGL remain unchanged:
- It is a tax of 45% on exceptional receipts that groups realise from electricity generation in the UK (including Renewable Energy Zones) from renewables, waste and nuclear.
- Exceptional receipts are aggregate receipts in a period to the extent in excess of a benchmark price. The EGL is therefore a tax on revenue, rather than profits, and is charged as if it were corporation tax (once all other liabilities and reliefs have been calculated).
- The EGL will apply to generation from 1 January 2023 to 31 March 2028.
The benchmark price remains at £75/MWh, but this will now be subject to CPI indexation from April 2024.
The generation threshold, below which a group will not be subject to the EGL has been reduced to 50GWh/year. The revenue allowance for a group remains at £10million (unindexed).
There is now greater clarity, in particular on the approach to the calculation of receipts, treatment of groups and joint ventures and certain allowable costs.
Exceptional Generation Receipts
Exceptional generation receipts for a period which are subject to the 45% EGL are essentially to be calculated as:
Generation receipts less the product of attributable generation and the benchmark amount less allowable costs less the revenue allowance for the period
A "generation undertaking" is a group of companies that includes at least one member who operates a relevant generating station (or a company, which is not a member of a group, which operates a relevant generating station). A group is defined on the basis of 75% subsidiaries (but company excludes partnerships/LLPs – there are specific rules for qualifying partnerships).
A “relevant” generating station excludes those principally fuelled by fossils fuels and pumped hydro. It also excludes those the output of which may give rise to payments under a CfD (i.e. the Start Date thereunder has occurred). The EGL applies only to “grid connected electricity generation”, which includes that involving a distribution system, but excludes private wire arrangements.
Generation receipts are amounts that it is “fair and reasonable” to attribute to relevant generation of a generation undertaking (whether or not received by the operator of the generation station) on the basis that the amounts reflect the amount realised for the wholesale purchase of relevant electricity. This formulation is intended to exclude receipts from ROCs or REGOs, ancillary services and the capacity market. This approach avoids seeking to be prescriptive about when and what amounts are realised (though HMRC will publish detailed guidance in due course) and some of the potential allocation and attribution difficulties we have previously identified may now become matters of accounting judgement rather than legal definition.
It is however permissible to take into account BSC offers to increase generation (but not bids), imbalance charges (but not BSUoS charges while these are still payable by generators) and arrangements to hedge the price of relevant generation.
In addition allowable costs may be deducted. These are presently exceptional generation fuel costs (where fuel/feedstock costs exceed specified historic levels), exceptional revenue sharing costs (e.g. the exceptional element of revenue sharing in connection with revenue sharing arrangements landfill waste) and qualifying electricity purchase costs (buying back power to meet contractual commitments). These clarifications will be particularly important to the energy from waste sector.
In a number of areas of the EGL the Government has provided for an ability to update provisions by the statutory instrument. In addition to applying certain existing transfer pricing provisions to the EGL, the draft legislation includes specific anti-avoidance rights for HMRC.
Groups and Joint Ventures
As noted above, exceptional generation receipts are calculated at the level of a group. In many instances this could dilute the benefit of the revenue allowance or generation threshold. The lead member of the group will be principally liable for EGL, with other members of the group also jointly and severally liable for such amounts. This may have cash flow implications at the level of individual companies.
However, where a member of a group has a significant minority shareholder (10%+), the group may elect for the portion of the group’s EGL liability that is attributable to the relevant member to be principally a liability of that member. Effectively this means the minority shareholder will indirectly suffer its share of the liability, through the cash flow effect being at this member, rather than at the lead member of the group. Such shareholders will doubtless be concerned as to the transparency of such calculation.
A “qualifying joint venture” arises where a company (a JV Company) is not part of a group but is 75% owned by no more than five persons. The legislation treats this differently from a generation undertaking that is not a 75% subsidiary, because in many such circumstances the generation of the joint venture is traded with, and monetised by the shareholders of such JV Company and treating the JV Company in isolation may result in distortions and opportunities for circumvention.
The approach is to seek to ensure that the measure of exceptional generation receipts here takes account of transactions that arise at both the level of the JV Company and its material shareholders (10%+). Government is not minded to treat a qualifying joint venture as transparent for the purposes of the EGL (but would welcome views on this). Instead a JV Company will first be subject to the EGL in its own right and then the material shareholders will be taxed on untaxed qualifying generation receipts (resulting from the JV Company’s £10m revenue allowance) and from on-sales/hedging (which are ignored in the JV Company’s EGL calculation).
Such a material shareholder in a JV Company is deemed to be a generating undertaking. It may deduct the cost of acquisition of power from the JV Company in calculating its EGL (but does not receive the benefit of deducting the benchmark price). However certain circumstances are identified where the current draft of the legislation produces anomalies, including where the shareholder has negative net generation receipts or receives power from the JV Company at less than the benchmark price. The latter of these is a feature of a number of major offshore wind financings. The Treasury will consider how to address these anomalies. In addition, a shareholder which hedges its share of the output of the JV Company, but does not acquire power from it, does not seem to come within this regime, which is contrary to our understanding of the UK Government’s intent here.
A similar regime applies where a JV Company is a member of a group (rather than an orphan) and a significant minority shareholder offtakes and on-sells a share of the power.
Since the beginning of the of year current generation has been subject to this regime. It is therefore good that we are now getting greater clarity as to its operation, though we still do not have resolution on a number of practically important issues.
The UK Government is continuing to consider some areas (including the above discussion of joint ventures), though emphasises that the policy decisions will not be revisited. Final legislation will be brought to Parliament as part of the spring Finance Bill and detailed guidance is to be provided by HMRC at that time.