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UK Government Persists with implementing Electricity Generator Tax

In November 2022, the UK Government introduced a temporary 45% tax on exceptional energy invoices derived from wholesale power production, accompanied by a "technical note" detailing the levy's operation. The Energy Generators Association (EGL) then adjusted the previous UK Government proposal...

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Government pushes forward with Levy on Electricity Generators in the United Kingdom
Government pushes forward with Levy on Electricity Generators in the United Kingdom

UK Government Persists with implementing Electricity Generator Tax

The Energy Profits Levy: A Look at Its Impact on the UK's Hydrogen and Renewable Sectors

The UK's Energy Profits Levy (EGL) was introduced in November 2022 as a temporary measure to address the excess profits of oil and gas companies, particularly during periods of high energy prices. The levy, set at a rate similar to Norway's windfall tax, is aimed at capturing windfall gains from volatile energy prices and will remain in effect until 2030.

The EGL is primarily a surcharge on taxable profits and does not directly tax hydrogen or renewable projects. However, it indirectly impacts these sectors by redistributing revenues from oil and gas profits into government-supported clean energy investments.

Starting from 1 January 2023, the EGL affects existing and potential investors in the UK clean power market. The levy applies to company groups or standalone firms that operate assets producing over 50 GWh annually of power in the UK, either sold in the UK or exported, and connected to the UK national transmission network or local distribution networks. This includes nuclear, green (including biomass), and energy from waste generators, but not revenues from storage.

One of the ways the EGL supports the hydrogen and renewable sectors is by funding infrastructure and reducing deployment risks. Revenues from the EGL are partly channeled to funds such as the UK's National Wealth Fund, which prioritizes green hydrogen and Carbon Capture, Utilization, and Storage (CCUS) projects, thereby improving capital availability and confidence for low-carbon investments.

The Hydrogen Sector Plan underscores the government's intent to reduce regulatory barriers and high upfront costs in hydrogen deployment, supported by fiscal mechanisms funded in part through levies like the EGL. This can improve the economics of long-term contracts in hydrogen by providing more stable funding and government backing.

However, the EGL's impact on upstream oil and gas profitability could influence the pace and scale of investment in CCUS and hydrogen hubs, as many hydrogen production pathways in the UK’s near term are linked to blue hydrogen (hydrogen produced from natural gas with CCS) rather than purely green hydrogen. Reductions in oil and gas investment could slow associated infrastructure, but the government’s coordinated strategy aims to mitigate these risks through direct support programs.

The EGL will not be tax-deductible from profits based on Corporation Tax. Payments of the EGL will depend on the taxpayer's audit reference date. For large companies with a December year end, the first quarterly instalment payment that includes an EGL repayment is anticipated to be on 14 July 2023. HMRC will provide further support on the interpretation and application of the EGL legislation in early 2023.

In summary, while the Energy Profits Levy does not directly tax hydrogen or renewable projects, it has a significant indirect effect by redistributing revenues from oil and gas profits into government-supported clean energy investments. This mechanism supports hydrogen and renewable markets but also raises concerns about upstream investment discipline and long-term market dynamics, especially where blue hydrogen links classical fossil assets with new decarbonization technologies.

Sources:

  • [1] UK Hydrogen Market Update, July 2025, GOV.UK: https://assets.publishing.service.gov.uk/media/6880b2139fab8e2e86160efe/hydrogen-update-to-the-market-2025.pdf
  • [2] KeyfactsEnergy, 2025-08-06, Chancellor on North Sea Windfall Tax: https://keyfactsenergy.com/news/32240/view/
  • [3] UK Oil and Gas Market, 2018-2032 Report: https://www.openpr.com/news/4127921/united-kingdom-oil-and-gas-market-report-2018-2032-field-wise
  • [5] UK Fiscal Policy and Energy Infrastructure, August 2025: https://www.ainvest.com/news/uk-fiscal-policy-market-sentiment-reeves-balancing-act-shapes-long-term-investment-opportunities-energy-infrastructure-2508/
  • The UK Government introduced a temporary 45% levy on "phenomenal" invoices generated from the production of wholesale power in November 2022.
  • The EGL will affect existing and potential investors in the UK clean power market starting from 1 January 2023 and will remain effective till 31 March 2028.
  • The Company Tax regulations that require large companies to make quarterly payments will apply to the EGL but no payment will be required until the Spring Finance Bill in which the EGL is enacted laws obtains Royal Assent.
  • A single benchmark cost of GBP 75 per MWh has been established for all energy generation models and will continue to be in place until April 2024.
  • The draft legislation includes provisions to combat tax avoidance strategies aimed at reducing or avoiding the EGL or its effects.
  • The EGL will apply to company groups or standalone firms that operate assets producing over 50 GWh annually of power in the UK, either sold in the UK or exported, and connected to the UK national transmission network or local distribution networks.
  • The EGL applies to nuclear, green (including biomass), and energy from waste generators, but not revenues from storage.
  • Special rules will apply to JVs and companies with significant minority investors.
  • The EGL will only apply to outstanding invoices exceeding GBP 10 million in an audit period.
  • The EGL is likely to have an impact on the UK's emerging clean hydrogen market, creating an incentive for long-term sustainable power supply arrangements for hydrogen projects to be priced at or below the benchmark cost.
  • The levy is called the Expense Plus Income Limitation (EGL) and was published with a "technical note" on its operation.
  • Payments of the EGL will depend on the taxpayer's audit reference date. For large companies with a December year end, the first quarterly instalment payment that includes an EGL repayment is anticipated to be on 14 July 2023.
  • HMRC will provide further support on the interpretation and application of the EGL legislation in early 2023.

The Energy Profits Levy (EGL) has a significant impact on the finance industry, as it redistributes revenues from oil and gas profits into government-supported clean energy investments, such as green hydrogen and Carbon Capture, Utilization, and Storage (CCUS) projects. Moreover, the EGL affects businesses in the energy sector, particularly those operating assets producing over 50 GWh annually of power in the UK, whether sold domestically or exported, and connected to the UK's national transmission network or local distribution networks, as these are subject to the EGL.

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