in a nutshell
In November 2022, the UK government announced a new temporary 45% levy on ‘exceptional’ income from wholesale electricity production and issued a ‘technical note’ on the operation of the levy. EGL superseded previous proposals from the UK government to introduce a ‘cost-plus-revenue cap’ for low-carbon generators not covered by CfD contracts, announced in October 2022.
Despite heavy criticism of the move by many clean energy market participants, on 20 December 2022 the UK government will publish a supplementary technical note and bill outlining the details of how the new tax will work. By making it public, we have confirmed our intention to promote the EGL. The EGL will be introduced from 1 January 2023 and will impact existing and potential investors in the UK clean energy market.
Scope of surcharge
The main features of EGL are:
- EGL will be implemented from 1st January 2023 and will be valid until 31st March 2028.
- This applies to energy from nuclear, renewable (including biomass), and waste sources, but not to revenues from storage. Specifically, “innovative storage technologies such as hydrogen” were excluded from his EGL.
- It focuses on the largest power producers. It applies to groups of companies operating assets that generate more than 50 GWh of electricity annually in the UK, or independent companies where applicable (both UK sales and exports). Connected to the UK domestic grid or local distribution grid. Applies only to exceptional receipts over £10m in an accounting period.
- Excludes revenues from the sale of electricity generated under a contract for difference (CfD) with Low Carbon Contracts Company Ltd.
- EGL is administered in the same way as corporate tax. Taxation details must be self-assessed on the corporate tax return, and amounts will be paid in line with corporate tax.
- The draft has provisions to combat circumvention arising from arrangements whose primary purpose is, or is one of the primary purposes, of reducing or avoiding the effects of EGL or legislation.
Calculation and administration of surcharges
- A 45% tax is applied to all “Exceptional Generation Receipts” calculated as follows:
Generation Receipt – Power Generation x Benchmark Price – Allowable Cost – Allowable Amount.
- In calculating generation revenues, the regulation allows payments and receipts under arrangements whose primary purpose is to serve as a hedge of exposure to fluctuations in electricity prices for arrangements related to generation covered by the regulation ( important factor for power producers, entering into long-term, financially settled hedges of output with corporate buyers).
- A single benchmark price of £75 per MWh has been set for all generation models and will remain so until April 2024. From April 2024, the benchmark will be aligned with the Consumer Price Index. The portion of a generator’s receipt below this level is not subject to the EGL.
- The EGL Technical Note contains a very limited list of acceptable costs (i.e. increased cost of fuel for power generation, revenue sharing for access to sites such as landfills, ungenerated contracts cost of buying power back from the grid to replace the output). Set the group’s annual allowance at £10 million.
- EGL is not deductible from income subject to corporate tax.
- Special rules apply to joint ventures and companies with significant minority shareholders.
- Corporate tax rules that require large companies to make quarterly payments apply to EGL, but no payments are required until the Spring Finance Bill, in which EGL was enacted, receives royal assent.
- EGL payments depend on the taxpayer’s accounting date. For a big company with his December end of the year, the first quarterly installment, including EGL payments, is expected to come on July 14, 2023. These businesses must file their first tax return containing his EGL by December 31, 2024. It is important to ensure that the systems and processes for determining and paying tax liabilities and filing returns are prepared to meet these additional requirements.
- Taxpayers subject to the EGL should ensure that their systems, policies and processes for tax calculation and payment are prepared for the upcoming implementation.
- HMRC will provide further guidance on the interpretation and application of the EGL legislation in early 2023.
Impact on energy markets
- When it comes to striking the fine line between the UK’s net-zero ambitions, energy security and rising cost of living, there are no simple solutions. A side-effect of this balancing act is that the introduction of the EGL may affect the UK’s reputation as a market that is less at risk of legislative change than other jurisdictions. Note, however, that the UK is not the only European country that has effectively imposed a windfall tax on clean energy generators. At the Energy Council meeting in September 2022, political agreement was reached on a Council Rule on Emergency Interventions to Address High Energy Prices. Under this regulation, 180 EUR/MWh for all EU Member States (note, among other things, that Member States may choose to set a lower threshold). As these interventions are implemented across Europe, we see growing concern from developers and investors with different member state approaches creating uncertainty for existing and future assets across Europe. .
- For companies with existing generation capacity linked to the UK, the levy is likely to impact the economics of the project, with a focus on low benchmark prices and the non-deductible EGL as a tougher intervention than in Europe. It is For funded projects, the impact on financial ratios should be considered. Also, given that EGL liabilities are jointly multiple for members of the same group, debt ring-fencing should also be considered.
- As previously mentioned, the earnings calculation takes into account financial hedges, such as long-term “hypothetical” PPAs with corporate buyers. This addresses an important concern for developers here. However, the introduction of the EGL and the extensive review of electricity market arrangements have focused attention on changing legal risks under long-term contracts.
- Finally, EGL could have implications for the UK’s emerging clean hydrogen market, which relies on low-cost renewable energy. These effects could be positive in that EGL creates incentives for long-term renewable power supply arrangements that keep hydrogen project prices below benchmark prices.
Our multidisciplinary energy team is happy to advise on the potential impact of these new developments on current and future hydrogen and renewable energy projects.
