- Background
Following on from its announcement of an electricity generator levy (the “Levy”) as part of the Autumn Statement 2022 (see here), on 20 December 2022, the UK Government published a supplemental technical note (the “Supplemental Technical Note”) (see here – this replaces the earlier technical note dated 17 November 2022), new draft legislation (the “Draft Legislation”) (see here) and a policy paper (the “Policy Paper”) (see here).[1] In this article, we discuss the confirmation of policy as well as updates of information released by the Government through these published documents since its original announcement as part of the Autumn Statement 2022.
Please get in touch if you would like more detail on the legislative and regulatory regime and how your business might be affected by it.
2. At a glance – main updates to the Levy
- Levy period: There has been no change to the Levy period. It will apply to revenues made from electricity generated during the qualifying period, from 1 January 2023 to 31 March 2028, regardless of when the revenues are actually received by the generator. However, the Levy will not apply retrospectively to revenues generated before 1 January 2023.
- Which sources of power generation are caught? In addition to nuclear, renewable sources and biomass which are transmission/distribution-connected, the Levy will apply to energy from waste sources as well. The Levy will apply to revenue from grid-related electricity generated in the UK (whether sold in the UK or exported).
- Which sources of power generation are excluded? Gas, coal, oil and pumped hydropower remain excluded. The Levy will also not apply to revenues from the storage of such power and grid stabilisation (except hybrid asset generators, who will need to identify the different revenue streams from generation). It will not apply to electricity generated outside the UK and imported, or under private wire arrangements or “behind the meter generation” that is not exported.
- De minimis: The threshold has been lowered from the original 100 GWh to groups generating more than 50 GWh per annum from qualifying in scope generation assets.
- Applicable revenues and size of Levy: It remains a 45% levy on actual revenues achieved above a certain benchmark price (starting at £75 per MWh). The Supplemental Technical Note: (i) introduces an annual indexation of the benchmark price by the Consumer Prices Index; and (ii) allows certain “allowable costs” which will be deductible from the generation receipts prior to the Levy being charged. These “allowable costs” include increased costs of generation fuel as compared to historic baseline fuel costs and revenue sharing arrangements for site access (e.g. when a generator pays a third party for access to a landfill to obtain the waste). The Levy will also not apply to the first £10m per annum of qualifying generation receipts. The Supplemental Technical Note provides more detailed guidance on what constitutes generation receipts and its consideration at a group level.
- Assessed on a group basis: Corporate groups and joint ventures (“JVs”) will be assessed as a whole (with certain additional rules to apply to JVs). The Supplemental Technical Note specifies that a corporate “group” will consist of the ultimate parent (the “Principal Company”), the Principal Company’s “75% subsidiaries” and the “75% subsidiaries” of those subsidiaries. Company B is a “75% subsidiary” of Company A if: (i) Company B is not a 75% subsidiary of any other company; and (ii) Company A is entitled to 75% of the profits (or assets in the event of winding up) of Company B or Company A directly or indirectly owns 75% of the ordinary shares of Company B.
- Additional rules for JVs: Qualifying JVs are subject to the Levy, as any other corporate group would be. In addition, the Levy will apply to “material JV members” (i.e. those holding at least a 10% interest in the JV) on their proportionate share of the JV company’s generation receipts such as to ensure that the £10m allowance applies only once to the relevant company’s generation receipts (i.e. at the JV level and not at the JV shareholder level).[2] Further, if a material JV member realises amounts from selling or hedging the applicable generation output of the JV, these amounts will be treated as negative or positive amounts when calculating the applicable generation receipts of the material JV member (and its group). These rules would not apply to unincorporated joint ventures, limited liability partnerships (LLPs) or partnerships (in these cases, the participating investors will be treated separately).
- Interaction with existing revenue regimes: The Levy does not apply to revenues earned under Contracts for Difference (“CfDs”) with an agreed strike price (unless that electricity is sold to the market on merchant terms), Capacity Market payments and revenues from the sale of Renewables Obligation Certificates (“ROCs”). The Supplemental Technical Note clarifies that the Levy will also not apply to revenues from: (i) accepted balancing market bids (under which a generator agrees to reduce its output); (ii) Renewable Energy Guarantees of Origin; (iii) Ofgem-regulated Feed-in Tariff generation and export tariff payments; and (iv) payments for ancillary services that are not connected with power provided to the grid.
- Payment of the Levy: The Levy will be administered in the same way as corporation tax in respect of self-assessment, payment dates, interest and penalties, etc. A single group company (known as the lead member and to be nominated by the group) will be liable for its actual payment, although the other group companies will remain jointly and severally liable. Allowance will be made for a group company with a significant minority shareholder (i.e. holding at least 10% of the company) to be able to pay its share of the Levy separately from the remainder of the group (based on the amount that can be reasonably attributed to the activities of that company).
3. Next steps
The Supplemental Technical Note provides many of the details that we had noted were needed to implement the Levy when it was proposed as part of the Autumn Statement 2022. At the same time, the Supplemental Technical Note is only intended to help generators prepare for the new tax. HMRC will issue formal detailed guidance in early 2023. The Government is proposing to implement the Levy by enacting the Draft Legislation as part of the Finance Bill.
If you would like to discuss further how the Levy might apply to your business, our market-leading energy team would be happy to assist you.
For further information, please contact:
Gitanjali Shankar, Linklaters
gitanjali.shankar@linklaters.com
[1] The Supplemental Technical Note confirms that the Levy replaces the Cost Plus Revenue Limit announced in October 2022 as part of the Energy Prices Act 2022 and that the Cost Plus Revenue Limit will not be implemented.
[2] The Supplemental Technical Note includes a worked example to demonstrate how this would operate.
