The draft Electricity Generator Levy legislation: what has changed?

For an overview of the key features of the EGL and related considerations for clients in the energy sector, please see our previous article here. But businesses will be disappointed by the broadening of the levy to apply to groups generating more than 50GWh per annum (rather than the previously announced 100GWh per annum).

Changes to the design of the EGL

Although many features of the EGL as originally announced remain the same, there are a few important changes:

• As mentioned above, the EGL will now apply to groups that generate more than 50GWh per annum (down from 100GWh).
• The benchmark price for determining what constitutes an “exceptional” return will initially remain at £75 per MWh but will be adjusted annually in line with the Consumer Prices Index from April 2024.
• A limited set of exceptional costs may be deducted when calculating the returns subject to the EGL, provided that they relate to (i) the increased costs of generation fuels, (ii) revenue sharing arrangements with third parties in return for gaining access to a source of fuel (e.g. a landfill site), and (iii) the costs of buying back electricity from the grid to replace contracted output that is not generated.

Further detail on scope

The draft legislation and supplementary technical note provide some welcome additional detail on the design and scope of the EGL.

• Generation receipts are attributed to the group by firstly determining the electricity generated by the group for export to the transmission network or local distribution network, and then attributing the amounts that it is fair and reasonable to attribute to such generation on the basis that they reflect, directly or indirectly, the amount realised (or to be realised) for the wholesale purchase of electricity arising from that generation (whether or not that electricity is actually generated). As a result, all revenue unconnected with the wholesaling of grid connected electricity generation should fall outside the scope of the EGL, e.g. revenue from electricity generated and used under a private wire arrangement or “behind the meter” generation that is not exported.
• For the purposes of the EGL, a group will consist of the ultimate parent (being a company that is not a 75% subsidiary of any other company), its 75% subsidiaries and the 75% subsidiaries of those subsidiaries.
• As was previously the case, the EGL is not intended to apply to revenue generated at an agreed strike price under a Contract for Difference (CfD) entered into with the Low Carbon Contracts Company Ltd. The legislation clarifies that this will only be the case where the generation actually gives rise to payments under the CfD (and so revenue generated by a CfD asset prior to the CfD start date will continue to be subject to the EGL).
• In addition to Renewables Obligation Certificates, revenue from Renewable Energy Guarantees of Origin will not be subject to the EGL. Revenue from the following sources will also be excluded:
  • accepted balancing market bids under which a generator agrees to reduce its output;
  • Ofgem regulated Feed-in Tariff generation and export tariff payments (although Feed-in Tariff sites that have opted to export on commercial terms will have to include such export revenue);
  • payments made other than in connection with power provided to the grid, e.g. ancillary services; and
  • Capacity Market Payments in the few cases where renewable generators are eligible.

Joint ventures

Further details have been provided as to how the EGL will apply to joint venture arrangements (JVs). The proposed rules are complex and apply the EGL both at the level of the JV entity and the JV’s members. To avoid JV members effectively benefitting twice from the £10m allowance in respect of generation activity carried out through the JV, material JV members (being members with a shareholding of at least 10%) will be treated as within scope of the EGL and attributed their proportionate share of the JV’s exceptional generation receipts that have been sheltered by the £10m allowance at the level of the JV. Returns made by the JV members from selling or hedging the JV output will also be subject to the EGL (and similar rules apply to groups that have significant minority shareholders). Where this results in negative amounts, it will decrease the exceptional generation receipts for the JV member. The government is also considering a rule that would allow negative amounts realised by a JV member to be surrendered to the JV, although this has not been included in the draft legislation.

Election for group members with significant minority shareholding to pay levy

The EGL will still be administered in the same way as corporation tax, with the liability to file returns and pay the tax falling to the lead member of the group. To make it easier for groups to ensure that the costs of the EGL are borne by the companies whose activities have given rise to those costs, rules have been included to allow groups to elect for member companies with significant minority shareholders to be individually liable for their share of the group’s overall EGL liability (being the amount that is attributable, on a fair and reasonable basis, to the activities of that member company). However, the group would remain jointly and severally liable for that group member’s EGL liability.

What’s next?

HMRC intends to issue draft guidance for taxpayers in early 2023, with the final legislation brought forward as part of the Spring Finance Bill 2023 and the first levy to be paid at the first corporation tax payment date of the lead member of the group following the entry into force of the legislation. HMRC is still consulting and has asked for any comments or questions to be sent to [email protected].