The UK government has announced the introduction of a windfall tax on certain electricity generators in the form of the ‘electricity generator levy’, a new 45% tax levied on ‘extraordinary returns’ from low-carbon UK power generation meeting certain conditions.
The levy will apply in addition to corporation tax, resulting in a 70% headline rate on the relevant revenues following 1 April 2023. It will be legislated for in the Finance Bill 2023 and take effect in relation to generation from 1 January 2023 until March 2028, and is forecast to raise £14.2 billion during that time.
Scope of the levy
The new tax will apply to corporate groups that undertake electricity generation in the UK from nuclear, renewable and biomass sources that are either connected at transmission or distribution level. Generators of this nature have been targeted on the basis they may currently be benefitting from increased wholesale electricity prices – driven by increases in the wholesale gas price – without having a corresponding increase in their costs of generation.
The levy will not apply to coal, oil or gas fuelled power generation, on the basis that these represent a small proportion of UK generation mix, have increased or volatile costs, and serve a unique function in ensuring the resilience of the market. It will also not apply to pumped storage hydroelectricity, or to battery storage plant.
A de minimis generation threshold will apply, which will limit the levy to groups generating more than 100 GWh per annum of electricity from in-scope generation assets in a qualifying period (being the accounting period of the group company responsible for administering the levy).
The technical note published by the government notes that the levy will be designed to cover electricity generated through joint venture structures, and that consideration will be given as to how the tax is most appropriately applied to these. Given the prevalence of joint ventures in the sector, the application of the levy and the accompanying de minimis, allowance and administration provisions to these structures seems likely to be an important aspect of the new legislation.
Calculation of the levy
In-scope groups will be subject to the 45% charge on ‘exceptional generation receipts’, which will be calculated as:
Generation Receipts – Electricity Generation x Benchmark Price – Allowance
- Generation Receipts is the total receipts of a group from in-scope UK electricity generation.
- Electricity Generation is the electricity generated by that group in the UK from in-scope generation in MWh;
- Benchmark Price is £75 per MWh (the price above which returns are considered ‘exceptional’ for the purposes of the levy).
- Allowance is £10 million per annum for the group.
The effect of this calculation means that receipts from in-scope generation at an average output price above £75 per MWh will fall within the scope of the levy, but such levy will only apply to ‘exceptional generation receipts’ in excess of £10 million. It appears that the £75 per MWh benchmark price may not be indexed, with the government suggesting this has been set at a level that allows for inflation during the intended period.
Revenue will be calculated on a group-wide basis – subject to the comments above regarding application to joint ventures – with specific treatment applying where electricity is supplied within a group before being sold to third parties or end consumers. It is stated that it will cover revenue from all potential routes to market (including power purchase agreements, long forward contracts and trading on markets). This will therefore include corporate PPAs where the generator meets the relevant criteria.
The levy will not though capture electricity generated ‘under’ a contract for difference (CfD) entered into with the Low Cardon Contracts Company Ltd, or revenue earned from the sale of Renewables Obligation Certificates or from capacity market payments. It is not yet clear precisely what the exclusion for electricity under a CfD will cover, and in particular whether electricity generated pre-start date (under the CfD) will still be out of scope.
Notably, the levy is charged by reference to revenue received as opposed to profits, though the published technical note does state that the measure of revenue should take account of or be adjusted for certain specific items. Given the hedging and other financial arrangements used by generators can be complex, precise details of what is taken into account seems likely to be a key consideration.
The electricity generator levy is chargeable in addition to UK corporation tax (which is currently charged at a rate of 19% and will increase to 25% with effect from 1 April 2023). The levy will not be deductible from profits subject to UK corporation tax and will be administered in the same way as UK corporation tax.
The levy will be legislated to end by 31 March 2028: this may take the form of a ‘sunset clause’ in the legislation in same way as the energy profits levy, so that further government or legislative action is not required to remove it. As the government paper states, if the electricity prices that a group receives falls below the £75 per MWh benchmark price before the electricity generator levy is removed, no levy should be due in respect of those amounts.
The government published both an energy taxes factsheet (available here) and a more detailed technical note (available here). Draft legislation is expected to be published in mid-December. The technical note indicates that the Treasury and HMRC will be contacting relevant generators to discuss how the proposals will be reflected in this legislation, and provides contact details for those that may be within the scope of the levy and wish to discuss.
We will continue to review details and the legislation once available: if you have any questions or it would be helpful to discuss this new tax, please do get in touch with us or your usual CMS contacts.