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Executive summary

As part of the Autumn Statement delivered by the UK's Chancellor, Jeremy Hunt, on 17 November 2022, the UK has put forward proposals for a new temporary Electricity Generator Levy which will apply from 1 January 2023. This levy is separate to the Energy Profits Levy which applies for the oil and gas sector. Changes to the rate, duration and operation of that levy were also announced in the Autumn Statement but are not covered here. For details, see EY Global Tax Alert, UK Chancellor delivers Autumn Statement, dated 17 November 2022.

The Government has not yet published draft legislation for the levy but its technical note on the proposals is available here. The UK authorities, HM Treasury and HM Revenue and Customs (HMRC) have said they will reach out to relevant generators to discuss how the levy will be implemented in legislation. In the meantime, in scope generators can get in contact through: electricitygeneratorlevy@hmtreasury.gov.uk. The aim is for draft legislation to be published in mid-December.

Detailed discussion

In scope groups or companies

• The levy will apply to corporate groups, or, where relevant, standalone companies, that undertake electricity generation in the UK and are either connected to a national grid or connected to local distribution networks.
• The levy will be applied to groups generating electricity from nuclear, renewable and biomass resources but not gas, pumped storage hydroelectricity, battery storage, coal or oil generation.
• The levy will not apply to electricity that is generated under a Contract for Difference entered into with the Low Carbon Contracts Company Ltd (LCCC).
• 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 in a qualifying period.

The levy

• In scope groups will be subject to a 45% tax charge on a measure of "Exceptional Generation Receipts."
• Exceptional Generation Receipts calculated as: Generation Receipts — Electricity Generation x Benchmark Price — Allowance.
• Where:
• Generation Receipts are the total receipts of a group from in scope UK electricity generation.
• Electricity Generation means electricity generated in the UK from in scope generation in Megawatt-hours (MWh).
• The Benchmark Price is set at £75 per MWh. For the purposes of the tax, this represents the average price above which generator returns are considered to be exceptional. The portion of generators' earnings below this level will not be subject to the levy.
• An Allowance is set at £10m per annum for the group.
• The 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 (the responsible company).
• The levy will not be deductible from profits subject to corporation tax.
• The levy is to be administered in the same way as corporation tax i.e., amounts to be returned within the responsible company's corporation tax return and paid in line with the responsible company's normal payment dates for corporation tax (including under the quarterly installment payments regime where appropriate).

Revenue calculation

• The measure of revenue used in the calculation will be the revenue received for output from in scope generation in the qualifying period irrespective of when the relevant contracts were entered into. It is anticipated to align closely with the timing of revenue recognition for financial reporting purposes.
• Where a group's generation output is sold to third parties, the revenue measure will be the third-party revenue that members of the group receive for electricity generated in the UK irrespective of whether the sale is made by the company that owns the relevant station or another member of the group.
• Where output is not directly sold to third parties but is used within a downstream UK supply business that generates revenue from the sale of electricity to end consumers, the measure of revenue will need to identify the wholesale component of those receipts.
• The revenue measure covers revenue from all potential routes to market including purchase power agreements, long forward contracts, and trading within the day-ahead and intra-day markets.
• The measure of revenue should take account of or be adjusted for:
• Revenue from accepted balancing market offers
• The net impact of imbalance settlement
• Gains or losses on financial derivatives used to hedge output and/or group trading relating to output e.g., buying back electricity in the market at a higher or lower price than output was previously sold.
• The 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 apply to revenue from electricity generated in the UK and sold in the UK or exported.
• It will not apply to electricity generated outside the UK and imported.

Joint ventures

• The levy will be designed to cover electricity generated through joint venture structures. Consideration is to be given as to how the tax is most appropriately applied to such structures.

Exceptional costs

• The measure of extraordinary generation receipts, to which the levy will be applied, will only take into account the limited costs set out above (e.g., the costs of purchasing back electricity in the market).
• If the measure of extraordinary generation receipts was to take account of or be reduced by additional costs, then those costs would themselves need to be extraordinary (i.e., costs that have risen to a similar extent to electricity prices and for reasons that are connected with the energy crisis). This might, for example, be relevant to generators that have experienced a substantial increase in the cost of fuel needed to generate electricity and an increase that is expected to persist moving forward.
• The Government has indicated that consideration could be given to the measure of extraordinary generation receipts being reduced by a measure of exceptional costs.

Timing and implementation

• The levy will take effect from 1 January 2023 and will be applied to receipts in respect of the generation of electricity by in scope generation assets after that date.
• It will be legislated to end by 31 March 2028. Where electricity prices received fall below the benchmark price (£75/MWh) before the levy is repealed, no levy would be due in respect of those amounts.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United Kingdom)

• Calum Black, Edinburgh | Calum.J.Black@uk.ey.com
• Iain Wintour, Edinburgh | iwintour@uk.ey.com
• Graham Wright, Manchester | gwright1@uk.ey.com
• Andrew Ogram, London | aogram@uk.ey.com
• Robert Hodges, London | rhodges@uk.ey.com
• Gillian Bolling, Glasgow | gbolling@uk.ey.com