Electricity Generators Levy: How it impacts renewable source power generators

The Chancellor’s Autumn Statement in November 2022 introduced the Electricity Generators Levy.

Not all windfall profits have been made by producers of energy from hydrocarbons. Renewable source power generators (e.g. nuclear power plants, windfarms, solar farms, hydro projects and biomass burners) may also be benefitting from a UK energy system that ties the price of electricity to the price of gas, without a corresponding increase in the costs of generation. The stated aim of the Electricity Generator Levy (or ‘EGL’) is to ensure that electricity generators also pay “their fair share towards strengthening public finances”.

Further clarity on the EGL was provided by draft legislation published by HMRC on 20 December 2022, which included changes to the details announced in November 2022. The government intends to introduce the draft legislation as part of the next Finance Bill. The draft may be subject to further revision to ensure it will work as intended. We will share more details in due course, once HMRC issues further guidance.

How will the Electricity Generators Levy affect you?

A temporary 45% levy on corporate electricity generators has been introduced from 1 January 2023 on “extraordinary profits”, defined as electricity sold at above £75MWh. The benchmark price of £75/MWh will be in place until 31 March 2024, and will then be increased annually in line with the Consumer Prices Index.  

• The measure will be in place from 1 January 2023 to 31 March 2028, applying to receipts in respect of relevant UK electricity generation after the commencement date.
• The levy will be applied to corporate groups generating electricity from nuclear, renewable and biomass in the UK and are either connected to a national grid or connected to local distribution networks.
• The levy will be limited, through the de minimis threshold, to those corporate groups generating more than 50 Gigawatt-hours (GWh) per annum of electricity from in scope generation assets in a qualifying period.

• In calculating the levy, a deduction will be available in the form of an allowance set at £10m per annum for a corporate group. The calculation will be undertaken at an aggregate level across all in scope generation of the group.
• The tax will not apply to electricity that is generated under a Contract for Difference entered into with the Low Carbon Contracts Company Ltd (LCCC). 
• The revenue measure 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 applied to pumped storage hydroelectricity or battery storage.
• Joint venture companies (JVs) will be subject to the EGL in their own right on the same basis as other companies. Any of the £10 million allowance used by the JV company, as well as amounts realised from selling or hedging the output of the JV, will be treated as additions or reductions to the JV shareholder’s exceptional generation receipts. The intention is to ensure that each group only benefits from a single £10m allowance in respect of exceptional generation receipts that it receives directly from its own generation activity or indirectly through relevant JV interests. The Government is continuing to consult with taxpayers on the treatment of qualifying joint ventures.

Calculating and administrating the Levy

Levy calculation

Exceptional Generation Receipts, which will be subject to the 45% tax charge, are calculated as:

Definitions:

• Generation Receipts: total receipts of a group from in scope UK electricity generation.
• Allowable costs: costs directly attributable to generation receipts subject to the levy, to provide relief for exceptional generation fuels costs above a baseline based on actual costs from 2017 to 2020. This is to include revenue sharing for access to sites like landfill, and costs for buying back electricity from the grid to replace contracted output that is not generated.
• Electricity Generation: electricity generated in the UK from in scope generation in Megawatt-hours (MWh).
• Benchmark Price: £75 per MWh (average price over an accounting period above which generator returns are considered to be exceptional) The portion of generators’ earnings below this level will not be subject to the levy). The benchmark price of £75/MWh will be in place until 31 March 2024, and will then be increased annually in line with the Consumer Prices Index.  
• Allowance: £10m per annum (accounting period) for the group.

This calculation will be undertaken at an aggregate level across all in scope generation of the group in respect of a qualifying period. The qualifying period will be aligned to the accounting period of the company responsible for administering the levy for the group .

A group is defined as the ultimate parent (‘the principal company’), its 75 percent subsidiaries, and 75 percent subsidiaries of those subsidiaries.

If electricity prices that the group receives fall below the benchmark price (£75/MWh) before the levy is repealed, no levy would be due in respect of those amounts.

The levy will not be deductible from profits subject to Corporation Tax.

Administration

The levy will be administered in the same way as Corporation Tax, with amounts required to be returned within the responsible company’s Corporation Tax Return.

Payment of the levy will be in line with the responsible company’s normal payment dates for Corporation Tax (including under the quarterly instalment payments regime where appropriate). Companies in quarterly instalment payment regimes will not need to pay any of the tax until the Finance Bill is enacted in March 2023.