Following our statement in response to the announcement of the Electricity Generator Levy on 17 November, this brief gives further insight into the key takeaways.
Regen Brief: our take on the Electricity Generator Levy
The Autumn Statement announced proposals for an Electricity Generator Levy, replacing the short lived idea of a ‘Cost-Plus Revenue Limit’ with a 45% tax charge on ‘Exceptional Generation Receipts’.
The government is aiming to publish the draft legislation in mid December.
“The levy will take effect from 1 January 2023 and will be applied to receipts in respect of generation of electricity by in scope generation assets after that date”.
The Treasury has invited input from generators via firstname.lastname@example.org.
As outlined in our statement, we support the principle of generators contributing to the costs of limiting energy bills, but call for change to ensure this does not deter investment which would lead to higher bills in the future. We have also underlined that fossil fuel generators seem to have been given a better deal than low carbon generators.
Could be worse…
The Levy applies from 2023 so is not retrospective and smaller generators will be exempt.
“The levy will be limited, through a de minimis threshold, to those groups generating more than 100 Gigawatt-hours (GWh) per annum of electricity from in scope generation assets.”
Contracts for Difference (CfD) projects are excluded, revenue from the Renewable Obligation (RO) is exempt and battery storage is also excluded, along with pumped storage and hydro.
Areas of concern
The timescale of the Levy runs until 31 March 2028, a long time for the market to get back to some sort of normality, meaning that the Levy is a significant factor to consider for investors in non-CfD projects.
The ‘benchmark’ price of £75 per MWh is higher than historic average prices, but is still quite low given that price expectations before the crisis were nearer £100-130 MWh. Inflation has also driven up build costs for many renewables technologies.
Why it matters for investment
Unlike most windfall taxes which apply retrospectively to profits made and decisions already taken, the Levy would apply to new projects built between now and 2028. As a result, it will directly affect investment decisions over the next 5 years.
So, while the oil and gas sector enjoy an investment tax credit, the Levy would penalise any investor thinking of building a project today who doesn’t get a CfD.
One solution, as well as reducing the timescale down from 2028, would be to either exclude future generation capacity, or offer a significant new allowance for new generation.
Areas of complexity
Whilst the technical note is helpful in providing more clarity than we often see, there is plenty of devil in detail. The following areas will require greater clarity:
- The definition of the ownership structures to which the Levy applies could be complex, particularly with joint ventures and group companies.
- Vertically integrated companies, selling energy to a downstream supply business or their own battery “will need to identify the wholesale component of those receipts.”
- It is not clear whether REGO revenue is included in revenue calculation.
- The revenue to be taxed will be adjusted for revenues from the balancing mechanism, imbalance settlement gain and losses, and hedging gains and losses.
- Companies with revenue sharing agreements – e.g. with landowners.
The inevitable complexities risk creating opportunities for ‘gaming’ the system. We may see plenty of PPAs at £75 per MWh, with other aspects of the agreement more favourable to generators.
We welcome your views on the impacts of this measure on investment decisions. It seems clear that no matter how this is pitched, as a ‘temporary’, exceptional measure, it will give investors pause for thought.
The measure may also increase the relative attractiveness of CfDs and make merchant projects less attractive, as the upside is more limited. We will be calling on Gov to significantly increase CfD budget allowances. We can also expect to see smaller projects and ownership structures become more attractive.