The electricity generator levy: a fine for doing well?

Sheena McGuinness, RSM’s head of renewables and cleantech, examines the electricity generator levy (EGL) and its negative impact on the renewables industry. 

Mark Twain said: 'A tax is a fine for doing well, a fine is a tax for doing wrong.' It appears the government has adopted this ethos with the windfall tax on revenues for electricity generators (the ‘EGL’).  

The levy, unveiled in the Autumn Statement, is expected to raise £14bn. It is a temporary 45% tax charge on exceptional receipts of low-carbon electricity generators, effective from 1 January 2023 until  31 March 2028. The levy applies to groups that use low and no-carbon sources of energy (such as nuclear, renewables, biomass or waste sources) to produce electricity.

What is the EGL and how does it work?

The levy is limited to companies or corporate groups (ie 75% groups) generating electricity that are connected to a national grid or to local distribution networks and whose output exceeds the de minimus threshold of 50 gigawatt hours per annum of electricity from in scope generating assets. Therefore, small standalone renewable energy producers may not breach the de minimus threshold and, as a result, won’t be required to calculate the amount (if any) of levy due. That said, corporate groups controlling several renewable special purpose vehicles (SPVs), a common structure within the renewables sector, will likely fall within the scope of the levy.

Once groups are within the scope of the levy, a deduction is available in the form of an allowance set at £10m for a corporate group, which is not as bad as 45% tax on all qualifying generation receipts. However, similar to the tax treatment of fines, any resultant levy is not a tax-deductible expense.

Newton’s third law: for every action, there is an equal and opposite reaction

In the renewables sector, the reaction of energy companies to the EGL should a be cause of concern for the government and their legally binding commitment to net zero. Energy companies have publicly stated that they may abandon some green energy plans. Funds that were ear marked for future renewable investment may be diverted to pay the windfall tax. What is more, for sector and / or geography agnostic investors, the UK renewables sector will be a less attractive proposition compared to other countries or industries. 

A report published by the Association for Renewable Energy and Clean Technology (REA) found the UK to be behind other European countries in terms of renewables deployment. Dr. Nina Skorpuska, REA chief executive, commented on the findings in the report on energy transition readiness: ‘If this were a league table, the UK would be in the relegation zone.’ 

The fiscal system is one of the primary levers that the government has at its disposal to shape behaviour. Why did the chancellor talk of an ‘energy reset’ amidst claims of the UK being ‘world leaders in renewable energy’, yet do nothing to shore up the renewables sector against other UK industries in the recent budget? With the EGL eating into profits and the UK viewed as the poor relation in terms of green growth investments compared to the US, EU and China, the government’s aim to ‘invest in domestic sources of energy that fall outside Putin or any autocrat’s control’ seems an empty promise with respect to renewables.

‘There may be liberty and justice for all, but there are tax breaks only for some.’ (Martin A. Sullivan)

North Sea oil and gas operators are liable for a windfall tax of 35%. Notwithstanding the 10% tax arbitrage on the windfall tax rates, as part of the transition to net zero and to encourage investment in the oil and gas sector, the UK government introduced an 80% allowance for decarbonisation activities. Labour has called this a significant incentive, allowing businesses to claim tax savings worth 91p for every £1 invested in fossil fuel extraction in the UK.

The government has not released any figures in terms of whether the relative (ie 80% decarbonisation allowance for oil and gas companies) or the absolute (ie the £10m deduction for low carbon electricity generators) is more favourable. That said, given the quantum of the required investment in the North Sea, we could assume the oil majors would view a £10m deduction as a drop in the ocean compared to the 80% allowance to which they are currently entitled. The tax regime is such that, despite being the main North Sea oil producer, many operators have received more money back from the UK government than they have paid in tax.

Including a provision in the EGL for a similar relative allowance or other tax incentives to level-up the regimes could prevent any slowdown in investment in the renewables sector. Momentum may be stunted without such a system. 

This current tax mismatch appears to negatively target renewables businesses, which are key to meeting the government’s net zero ambitions and, it’s worth noting, have no need to decarbonise.

Conclusion

While the purpose of introducing the EGL was to tax the high profits of energy companies during unpopular energy price hikes, it seems misaligned with the government’s energy transition goals, and the regime is not on an equal footing with the taxation of North Sea oil and gas producers. 

Is it time for impacted businesses to embark on joint lobbying against the inequality of the tax regimes and the risk now posed, as a result of the introduction of the EGL, of not meeting the country’s net zero target? 

How RSM can help

RSM is a leading audit, tax and consulting adviser to mid-market business leaders. We have extensive experience working with clients in the renewables and cleantech sectors and are committed to supporting businesses in the industry.

If you would like to discuss the impact of the EGL on your renewables business, please contact Sheena McGuinness.