In his Autumn Statement, the UK Chancellor announced a new Electricity Generator Levy (the "Levy"), which replaces the previously planned Cost Plus Revenue Limit. The Government felt the new Levy is a more proportionate measure that is not only administrable through the corporate tax system which generators are familiar with but will leave generators with a greater proportion of their returns to invest in growing the UK's renewable energy capacity.
Stephen Hill, International Head of Clean Energy at Eversheds Sutherland comments: "In the increasingly fast paced and contradictory electricity regulatory regime that seems to constitute the norm now, it is pleasing finally to have some detail on which investment decisions can be made. Whether this is an appropriate mechanism, and targets all the beneficiaries of the 'weaponisation of gas' by Russia remains to be seen. There are still gaps in the Autumn Statement and this will still cause concern in a market that has been on pause since the 'windfall tax' was first announced – we need prompt and definitive clarifications around this."
- The Levy is a temporary 45% tax that will be levied on the "extraordinary returns" from low-carbon UK electricity generation.
- "Extraordinary returns" will be the aggregate revenue that generators make in each accounting year from in-scope generation at an average output price above £75/MWh.
- The Levy will only apply to generators whose corporate group's in-scope output exceeds 100GWh across the accounting year, and will only then apply to extraordinary returns of the group in excess of £10 million.
- The Levy will apply from 1 January 2023, and will be legislated for in the Spring Finance Bill 2023.
The technical note accompanying the Autumn Statement adds further guidance:
- "In-scope" generation is nuclear, renewables and biomass. Battery storage, pumped hydro, oil, coal and gas generating plants are excluded. Projects with CFDs will also be excluded. Gas plants are excluded on the basis that they are exposed to the high price of gas, which itself is the main reason for the high wholesale electricity prices.
- Revenue from ROC sales and CM payments will be excluded from the calculation, but the projects themselves would still be subject to the Levy in respect of their other revenues. The Levy will apply in full to FIT projects. It is not clear whether revenues from the likes of REGOs and embedded benefits will be considered in-scope. REGOs are linked to the MWh output, in a similar way to ROCs, and given the technical note expressly excluded ROCs one might assume they could be considered in-scope.
- The Levy will only apply to generators who are either connected to the transmission or distribution network, so it seems private wire supplies are excluded.
- The relevant periods of time over which the revenues/thresholds are assessed are "qualifying periods", which will be aligned with the accounting period of the company that will be responsible for administering the Levy for the corporate group (i.e. accounting years).
- The Levy will be applied in the same way as Corporation Tax, and will not be deductible from profits subject to Corporation Tax. Amounts will therefore need to be returned within the responsible company's Corporation Tax Return. Combined with Corporation Tax, the Levy brings the cumulative rate on earnings over £75MWh to 70%. In the fact sheet, the Government has commented that the temporary and proportionate Levy is not expected to harm long term investment due to it applying to only a portion of excess profits and electricity generators still being able to write off their investments against corporation tax by deducting their investment spending from their profit.
- The Government have said the Levy will be "temporary", but it is not yet clear when the Levy will end. The Government has indicated the Levy is expected to raise around £14.2 billion over the forecast period 2022-2028, which may give some indication of how long it may be expected to last (and would align with the new extended period for the O&G Energy Profits Levy). The technical note implies a link between the implementation of the significant reforms expected under the Review of Electricity Market Arrangements (REMA) and the introduction of the Levy as an intermediary solution, so one might deduce that the Levy may be with us until the relevant part of REMA is delivered.
- Regarding the various thresholds:
- the 100GWh threshold will apply to the generator's corporate group, rather than on a per asset or per company basis. If the threshold is reached it switches on the Levy for all such capacity (i.e. not just that in excess of 100GWh);
- the £10 million threshold will also apply to the generator's corporate group, but that first £10 million is not subject to the Levy; and
- the Levy will be designed to cover electricity generated through joint venture (JV) structures, although more detail is expected to be released in relation to this.
Eversheds Sutherland reaction
Whilst expected, the Levy will be unwelcome to many generators who in normal times spend more time concerning themselves with low energy prices, due to increased renewable uptake, than super-profits. This has historically driven many to Government CFDs and virtual or fixed price PPAs, which will now be delivering super-profits for the Government and significant benefits to corporate offtakers. But those who chose to take a risk on "merchant" projects (i.e. exposed to wholesale price fluctuations) will be seeing the critical "reward" part of the risk-reward balance for such projects being significantly eroded, without any commensurate relief on the "risk" part (when prices return to normal levels). We expect many generators will have been looking to swiftly reinvest this extra-ordinary profit into further renewables deployment, which is critical to the UK getting itself out of the energy crisis. The Levy may deal a considerable blow to investor confidence in merchant projects, and impact pipelines.
Generators and offtakers/suppliers may now be looking at their PPA change in law clauses to see if/how the impact of the Levy might be rebalanced. As we learnt from the COVID days of reviewing force majeure and change in law clauses, it boils down to the specific contractual language used, and in many instances changes in taxation (including levies) may be excluded from change in law. If change in law is triggered, it is also unclear how the negotiation will look, as any adjustments to the price (grossing up) may also be captured by the Levy.
Customers on private wire supplies where the price of gas/electricity is linked to the wholesale price seem particularly vulnerable, as the discounts available to non-domestic customers under the Energy Bill Relief Scheme will generally not apply to such supplies, and the generator's profit will not be levied under this new Levy. The Government has now launched a Call for Evidence on non-standard supplies in the context of the Energy Bill Relief Scheme.
Finally, it is not clear what the policy intent is behind expressly excluding ROC revenues from the in-scope revenues, but not FIT generation tariff or REGO revenues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.