EGL is a new temporary tax of 45% on exceptional generation receipts for electricity generated from nuclear and renewable (including biomass) sources and waste. The new tax begins on 1 January 2023 and ends on 31 March 2028.
Headline changes are:
- Indexation of the benchmark price of £75/MWh
- Reduction of the generation threshold from 100GWh to 50GWh
- Details of exceptional costs relating to the acquisition of generation fuel and feedstock that can be taken into account and how they are calculated
- A more exhaustive list of revenue and cost items and how they are treated
- Definition and treatment of groups
- Definition and treatment of joint ventures
The technical note also states that not all of the proposals contained in it with regard to joint ventures are in the draft legislation and more work is required to consider the joint venture rules.
As these are both draft documents and the law has not yet been enacted, it can be expected that there may be further changes as the Government considers responses from interested parties in respect of the draft proposals.
Generators covered by EGL are corporate groups or standalone companies that operate electricity generation assets in the UK which are connected to the national transmission network or local distribution networks.
There is a threshold of 50GWh per annum electricity generation from in scope assets. The threshold has been reduced from the original 100GWh to remove disincentives to generation.
In scope assets are those which generate electricity from nuclear, renewable (including biomass sources) and energy from waste.
Only electricity exported to grid or local distribution networks is included. Self-supplies and supplies by private wire are not included.
Calculation of EGL
The calculation of EGL has been changed since the original proposals through the introduction of allowable costs as a deduction.
EGL is 45% of exceptional generation receipts, with exceptional generation receipts now being calculated as:
Generation receipts – electricity generation x benchmark price – allowable costs – allowance
There is detailed guidance in the supplementary technical note. Some of the important highlights to note:
- Generation receipts are total receipts of the group related to the generation, including any onwards sale or hedging undertaken by group members who did not operate the generating asset;
- The benchmark price of £75 per MWh is now to be indexed to the Consumer Price Index and will be adjusted each year from April 2024.
- Allowable costs is a new feature and allows for deduction of a limited set of exceptional costs including exceptional costs of generation fuels, revenue sharing for access to sites such as landfill, and the cost of buying back electricity from the grid to replace contracted output that is not generated.
- Allowance is £10m per group
- An addition may be needed if the group or standalone company has interests in JVs, see the JV rules below
What in scope generating assets are not included in EGL?
EGL does not apply to:
- revenue from sale of electricity at the agreed strike price under a Contract for Difference (CfD) with the Low Carbon Contracts Company Ltd, but revenues from electricity sold on merchant terms to the market by a generating asset with a CfD is included within EGL;
- Renewable Obligation Certificates (ROCs) or Renewable Energy Guarantees of Origin (REGOs);
- Ofgem regulated Feed-in Tariff generation and export tariff payments. Note that Feed-in Tariff sites that have opted to export on commercial terms will have their export revenue included in EGL;
- Capacity Market Payments;
- Battery storage, pumped hydroelectric storage and innovative storage technologies such as hydrogen, and grid stabilisation, but hybrid assets which also generate power will need to separate the generation and storage flows and revenues.
There are extensive proposed rules for the treatment of joint ventures (JVs), not all of which have made their way into the draft legislation, and the supplementary technical note observes that there is further work to be done on the JV rules.
Provided that JVs do not form part of a group due to their being no shareholder with a 75% interest the JV is, in theory, treated as a standalone company.
The issue with treating the JV as a standalone company is that part of the exceptional generation receipts associated with the JV generation may be realised by JV members by, for example, acquiring power at a low price and selling it at market price.
The proposed rules are designed to prevent unfair outcomes, commercial distortion, and opportunities for circumvention of EGL through restructuring.
The proposed rules are summarised below:
- Step 1: Tax the JV in its own right either as a standalone company or corporate group in the normal way
- Step 2: Tax the JV members on untaxed JV exceptional generation receipts, which effectively means adding the JV members share of the £10m JV allowance to its own exceptional generation receipts.
The purpose of this step is to ensure that each group only benefits from a single £10m allowance either for its own direct generation activity or for indirect activity through a JV.
- Step 3: Tax the JV members on returns from selling or hedging JV output by adding to or reducing the members own exceptional generation receipts.
The supplementary technical note contains a lot more technical detail on the rules and their operation, and is worth close consideration by businesses with JV interests.
How we can help
We have environmental tax specialists with deep expertise in the energy sector. If you are within EGL we can help you to understand how it applies to your business and any joint ventures, assess the impact, model cash flow impacts, calculate revised payments on account, review contractual implications and prepare your corporation tax return with the EGL calculation.
Approval code: NTAJ14122280
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.