UK Government Pushes Forward with Electricity Generator Tax
New Government-Imposed Levy Aims to Balance Revenues in UK's Clean Power Sector
The UK government has introduced a new levy, known as the Expense Plus Income Limitation (EGL), targeting certain low carbon electricity generators. This levy, set to run until 2030, aims to balance revenues received from low carbon power generation, particularly during periods of high energy prices.
Key Details
- Duration and Scope: The EGL is a temporary levy that applies to specific clean power generators, primarily renewable and low carbon generators benefiting from market price spikes. It is currently scheduled to run until 2030, but the UK government is conducting consultations on a successor mechanism to replace it at or before that time.
- Trigger and Conditionality: The EGL is linked to oil and gas price thresholds under the Energy Security Investment Mechanism (ESIM). If oil and gas prices fall below specified reference prices, the EGL will cease to apply.
- Calculation: The levy is calculated based on excess revenues generated by qualifying low carbon generators, effectively limiting the income these generators can retain from electricity sales above a given threshold. The exact formulas and thresholds are set by legislation.
- Administration: The EGL is administered by HM Revenue & Customs (HMRC) as part of the corporate income tax framework. It supplements existing tax regimes and works alongside other incentives and fiscal measures for the energy market.
- Impact on the Energy Market: The levy aims to mitigate windfall profits for low carbon generators driven by high fossil fuel prices that increase wholesale electricity prices. It redistributes revenue from generators with higher-than-expected earnings due to current market conditions, helping stabilise costs for consumers and support government energy policy objectives.
Exemptions and Implementation
The EGL does not apply to "advanced storage technologies such as hydrogen." HMRC will provide further support on the interpretation and application of the EGL legislation in early 2023. The levy will be implemented similarly to Corporation Tax, with information required to be self-assessed in business income tax returns and amounts due payable in alignment with Corporation Tax.
The UK Government introduced a 45% levy on "phenomenal" invoices from wholesale power production in November 2022, which serves as a precursor to the EGL. The EGL will be in effect from 1 January 2023 until 31 March 2028. It applies to nuclear, green (including biomass), and energy from waste generators but excludes revenues from storage.
Special rules will apply to JVs and companies in which there are significant minority investors. The EGL applies only to outstanding invoices exceeding GBP 10 million in an audit period. Payments of the EGL will rely on the taxpayer's audit referral date, with the first quarterly instalment payment for large firms with a December year end expected to be on 14 July 2023.
The draft legislation includes provisions to combat avoidance strategies aimed at reducing or avoiding the EGL or its effects. Earnings from the sale of electricity produced under a Contract for Difference (CfD) are excluded from the EGL. The EGL technological note lists a minimal list of allowed costs, including enhanced costs of generation gas, earnings sharing for accessibility to sites such as landfill, and the costs of redeeming power from the grid to replace acquired outcome that is not produced.
In summary, the EGL is a temporary, revenue-based levy on certain low carbon electricity generators, conditional on fossil fuel price thresholds, administered via HMRC. It aims to limit windfall profits in the UK's clean power sector, with the government consulting on mechanisms to replace EGL in the future.
The new government-imposed levy, called the Expense Plus Income Limitation (EGL), is significantly impacting the finance and business of certain low carbon electricity generators within the UK's clean power industry. This levy, which applies primarily to renewable and low carbon generators benefiting from market price spikes, is a revenue-based measure aimed at balancing income received from low carbon power generation, particularly during periods of high energy prices in the business industry. The EGL is set to run until 2030, but the UK government is currently considering a successor mechanism to replace it at or before that time.
