UK Government increases Energy Profit Levy and introduces Electricity Generator Levy
25 November 2022
As part of the Autumn Statement of 17 November 2022, the UK Government has confirmed its decision to impose new "windfall" taxes on the energy industry. In this briefing we consider the details, with a particular focus on the new Electricity Generator Levy.
Energy Profit Levy
The Energy Profit Levy, which applies to the profits of oil and gas companies, was introduced earlier in 2022, applying to accounting periods beginning on or after 26 May 2022. The levy was originally introduced at a rate of 25% but is now being increased to 35%. It is intended that the levy will remain in place until the end of March 2028.
As the levy applies in addition to existing taxes (a 30% Ring Fence Corporation Tax and a 10% Supplementary Charge), this measure will bring the effective tax rate for the oil and gas sector to 75%.
An 80% investment allowance, introduced at the same time as the levy, will now be reduced to 29%. However, decarbonisation expenditure such as modifying existing installations to use power from offshore windfarms, installing bespoke wind turbines to power the installation or running electricity cables to the installation from shore, will continue to qualify for the current investment allowance rate of 80%.
Next steps: the changes will be implemented under the Autumn Finance Bill 2022, other than the changes related to decarbonisation expenditure, which will be included in the Spring Finance Bill 2023.
Electricity Generator Levy
In response to the high electricity prices which are linked to the high gas price, the Government previously tabled proposals to introduce a "cost plus revenue limit" cap on the revenues of certain generators, such as renewables. The Government went as far as putting in place statutory powers to introduce such a scheme under its emergency legislation, the Energy Prices Act 2022.
However, there has now been a change in approach. The Government has announced that it will introduce a new Electricity Generator Levy instead of the "cost plus revenue limit".
The key features of the levy, as announced on 17 November 2022, are as follows:
- the levy is being set at 45%;
- the levy will apply from 1 January 2023 and will be applied to receipts in respect of generation of electricity by in-scope generation assets after that date, until 31 March 2028;
- the levy will only apply to groups:
- generating electricity from nuclear, renewables and biomass in the UK, on the basis that these technologies are benefitting from a significant increase in revenue without a corresponding increase in the costs of generation (while energy from waste is not mentioned, it is assumed that the levy will apply to it);
- generating more than 100 GWh per annum of electricity from in-scope generation assets in a qualifying period. The qualifying period will be aligned to the accounting period of the company responsible for administering the levy for the group;
- the levy will not apply to:
- electricity generated pursuant to a Contract for Difference entered into with the Low Carbon Contracts Company Ltd (as that revenue is already subject to a strike price cap);
- electricity generated from pumped storage hydroelectricity, coal, oil or gas, or battery storage;
- the levy will apply to the "Exceptional Generation Receipts" of in-scope generators – which are the receipts of the group (from in-scope generation) above a set benchmark of £75/MWh, less a £10 million per annum allowance for the group;
- when calculating the "Exceptional Generation Receipts, the revenue that will be taken into account:
- will include revenue from all potential routes to market including purchase power agreements, long forward contracts, and trading within the day-ahead and intra-day markets, irrespective of when these arrangements were entered into;
- will not include revenue that renewables generators earn from the sale of Renewables Obligation Certificates or revenue from Capacity Market payments;
- the levy will not be deductible from profits subject to Corporation Tax. This means that, when the rate of Corporation Tax increases to 25% in April 2023, the effective tax rate applying to the "Exceptional Generation Receipts" (assuming that such receipts generate profits chargeable to Corporation Tax) will be 70%.
The Government has also specified that the measure of revenues for the levy should take account of gains or losses on "financial derivatives" used to hedge the electrical output. How this is implemented will be important for generators that are selling power at wholesale prices but do not actually receive the benefit of any higher electricity prices as a result of having fixed their exposure through various different forms of derivative instruments, including virtual PPAs and contracts for differences with private counterparties.
In Figure 1 we have set out an illustrative example of the effect of the Electricity Generator Levy, based on the information available as at the date of this briefing.
Next steps: the new levy will be implemented under the Spring Finance Bill 2023, which is due to be published in mid-December. While there is no indication that a formal consultation will be launched, the Government appears willing to engage with industry on the design on the levy. HM Treasury has said that HM Treasury and HMRC will "reach out" to relevant generators to discuss how the details set out in its "Technical Note" (see below) will be implemented in legislation. In addition, generators are being invited to contact HM Treasury by e-mail at:
electricitygeneratorlevy@hmtreasury.gov.uk
More information: the details of the Levy are set out in two documents published on 17 November 2022:
- a Technical Note; and
- an Energy Taxes Factsheet.
Figure 1: Illustrative example of the effect of the Electricity Generator Levy
| assumptions | calculations |
|---|---|
In this example, it is assumed that:
We have disregarded any potential adjustments for tax purposes (including capital allowances and interest deductibility ceilings). For the sake of simplicity, we have assumed that at all times the rate of Corporation Tax is 25% (noting that the increase from 19% to 25% will actually take place on 1 April 2023). | Corporation Tax Position after Electricity Generator Levy applies (i.e. revenues after 1 January 2023) Electricity Generator Levy Electricity Generator Levy = (Generation Receipts – Benchmark Generation Receipts – Annual Allowance) x 45% £(89,000,000 - 59,000,000 – 10,000,000) x 45% = £9,000,000 Corporation Tax Corporation Tax = (Total Revenue – Operating Costs – Finance Costs) x 25% (£89,000,000 - £30,000,000 - £20,000,000) x 25% = £9,750,000 Total Tax £18,750,000 Effective tax rate: 48% Corporation Tax Position before Electricity Generator Levy applies (i.e. revenues before 1 January 2023) Corporation Tax £(89,000,000 - 30,000,000 - 20,000,000) x 25% = £9,750,000 Total Tax £9,750,000 Effective tax rate: 25% |
