Electricity Generator Levy- Some actions for renewables to take right now.
21 Nov 2022
4 min read
A lot has been written about the Electricity Generator Levy announced in the Autumn Statement last week so we are not going to repeat all of the details. Instead, this post covers some of the key points that the Government still needs to confirm and some actions that we think those potentially caught by the Levy ought to be taking right now.
Background
To briefly recap, the Electricity Generator Levy applies to revenues from “in scope” electricity generated on and from 1 January 2023 to indicatively 31 March 2028 and will be a 45% tax on extraordinary returns from low-carbon electricity generation. Extraordinary returns is defined as the aggregate revenue that generators make in a period (the relevant company’s accounting period) from in-scope generation at an average output price above £75/MWh. This will be limited to generators whose in-scope generation output exceeds 100GWh across a year and will only apply to extraordinary returns exceeding £10 million. Normal corporation tax principles will also remain in place.
The Levy revenue calculations do not take into account revenue from the sale of Renewables Obligation Certificates or Capacity Market payments but do take into account other generation revenues such as imbalance payments and certain balancing mechanism payments. The revenue calculations also only permit a narrow selection of costs to be deducted. At a more macro level, the Levy doesn’t apply to generation projects that have secured a CfD with LCCC or battery storage, pumped storage, coal or gas generating stations. It also appears that generation that is not “connected” to the transmission or distribution system is exempt.
Key Unknowns
The wider detail on the Levy will be filled out relatively quickly over the next few weeks, but some key points that the Government needs to confirm (and which generators may have a view on which they want to share with the Government) include:
- Is a private wire project that has a back-up grid connection excluded or included in the category of generators that can be subject to the Levy? If included, is it only the revenues from the export of electricity to the distribution or transmission network that is taken into account for the purposes of the Levy?
- Do REGO revenues count in the revenue calculation? Given the latest e-REGO auction cleared at £6.90 per certificate for wind and PV and between £5.25 and £5.30 for fuelled projects this could be important.
- Are corporate PPA revenues included? We think yes but also note that pay outs by generators under synthetic or virtual PPAs will be taken into account and thus potentially enable a reduction in the revenue calculation.
- Does the end of this “temporary” levy revolve around the implementation of REMA (the Review of Electricity Markets)? If so, is that likely to have occurred by 2028? What happened to the transition to pot zero by the end of next year? This looks parked.
- What anti-avoidance measures will there be?
Action Required
More immediately, generators, funders, lenders and others should start:
- Considering whether generators (and corporate groups) are likely to be subject to the Levy, taking particular care to determine whether the generator / corporate group might be on the margin of the 100GWh threshold because unless something changes, they might be better off managing the generation output (taking into account the £10 million allowance).
- Speaking to Government on the above and other areas quickly to avoid unwanted consequences. This has been proposed very quickly and not all consequences can have been considered.
- Checking contracts to see whether they provide for a change in law reassessment, how changes in tax are dealt with and whether there is an ability to reopen the sharing mechanism / fees etc. These contracts include power purchase agreements, corporate power purchase agreements, hedging arrangements, lease arrangements and all other contracts that might have a revenue share arrangement / relate to electricity generation revenues.
- Checking whether projects are eligible for the future CfD rounds / CM rounds, including that the necessary documentation has been obtained and reviewing the consultations and announcements for the next allocation round.
- Subject to certain Government clarifications, considering whether proposed and existing projects can be repurposed / amended to enable private wire supply and/or generation linked to storage and/or hydrogen production and the economic implications of doing so.
- Considering whether it may be beneficial to enter into long term trading arrangements under which generators receive £75/MWh (or slightly more, taking into account the allowance) during the Levy period and for a long time thereafter, giving generators greater revenue certainty over a longer period.
Burges Salmon has been sitting on the industry groups looking at these emergency measures as they emerge from Government and is already considering the ramifications of these announcements on wide range of contracts. If you would like to discuss any of the above get in touch with Ross Fairley ([email protected]) or Alec Whiter ([email protected]).
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