Few were left surprised by the Chancellor’s announcement of a new tax to be levied on low-carbon electricity generators. As tends to be the case with fiscal events, the proposal was widely touted in the media in the weeks ahead, with reports of a 40 per cent tax expected.[1]
Delivering his statement in the House of Commons yesterday, the Chancellor confirmed a 45 per cent levy on the ‘extraordinary returns’ of electricity generators.[2] But what defines an ‘extraordinary return’ and which electricity generators will be impacted? Crucially, what about reinvestment allowances? Thankfully, the Treasury published further detail on the policy shortly after the statement.[3] Below, Brevia unpacks some of the key takeaways from the new Electricity Generator Levy:
- An additional tax of 45 per cent will apply on revenues over £75 per MWh.
- The levy will be based on actual revenue received. Revenue earned from Renewables Obligation Certificates or Capacity Market payments will not be included in the revenue measure.
- The levy will take effect from 1 January 2023 with the intention to end by 31 March 2028. Should electricity prices fall below the benchmark price (£75 per MWh) before this, no levy will be due in respect to those amounts.
- The levy will be applied to those generating electricity from nuclear, renewable and biomass sources. Flexible technologies that allow energy to be stored, such as pumped storage hydroelectricity and battery storage, will not be subject to the levy. Gas generators will also be excluded.
- Smaller generators, i.e. those who generate less than 100GWh, will also be exempt, as will generators that have entered into a Contract for Difference.
- There is no reinvestment tax break as is the case under the Energy Profits Levy for oil and gas producers. However, there is a £10 million allowance per annum before the tax is applied.
With seemingly unequal tax breaks and the exclusion of gas from the levy, it is fair to say that those in the low carbon industry have not reacted with glee to the policy announcement.[4] Naturally, concerns have been raised over the signal this sends to investors when it comes to the UK’s priorities. And whilst the policy decision does provide some form of stability now, it is important to remember the instability that preceded. Over the course of the summer and autumn months, we have seen numerous different policies and potentials trailed. Both the move to voluntary CfDs and the Cost-Plus Revenue Limited seem to have entirely vanished, despite being legislated for in the Energy Prices Act. It is therefore understandable that following months of this uncertainty, industry feels almost cheated. Not only have they had to deal with this policy uncertainty and the impact this has on investor stability, but they have been left with a policy that could risk vital future investment.
It remains to be seen whether the benefits will outweigh the potential costs of this policy decision. One thing is certain however; international investors will be taking note of the signals the UK government is sending. Let’s hope that this policy, and the wider uncertainty that proceeded it, does not increase the final cost of getting to net zero.
REFERENCES
[1] The FT, ‘Hunt draws up new windfall tax on UK electricity generators’, 14 November 2022, Link
[2] HMT, ‘The Autumn Statement 2022 speech’, 17 November 2022, Link
[3] HMT, ‘Electricity Generator Levy Technical Note’, 17 November 2022, Link
[4] Business Green, ‘It seems odd to have taken this approach’: Anger builds over Chancellor’s clean energy tax raid’, 18 November 2022, Link
