02 November 2023
Sheena McGuinness, RSM UK’s head of renewables, explores what we are likely to see in the Autumn statement versus what the government could and should be doing to incentivise investment in green energy.
The energy transition and climate change are not new topics. However, as a nation our response to our legally binding net zero target seems to have taken a backward step of late and we are not on an equal footing with other developed nations in terms of our renewables attractiveness index. With the forthcoming Autumn statement there is an opportunity to move towards parity with other countries. Here we look at the past, the present and the future of tax incentives and the attractiveness of the UK for the renewables sector.
If past performance is an indication of future outcomes, the Autumn statement is likely to be decidedly lacklustre in terms of green incentives. Specific positive green tax incentives have been lacking in recent statements and the UK is lagging behind other countries in this regard. In fact, the most recent green tax that was introduced, the Electricity Generator Levy (EGL), is a disincentive to invest in green energy compared to other energy forms, other sectors, or, for those investors with a mandate to invest in green energy, other geographical locations.
The EGL is a 45% tax on turnover on qualifying electricity generator assets, subject to exceeding certain thresholds. The levy is applicable to companies or groups generating electricity from nuclear, renewable, biomass and energy from waste sources. This, coupled with the increasing cost of capital, the government U-turn back to oil and gas and lack of positive tax incentives for renewables businesses, has seen a material underperformance of renewable energy stocks. For example, the S&P Global Clean Energy Index has dropped over 20% over the past few months. In the same timeframe, there was the failure to attract any bids from offshore wind developers in the UK’s annual renewable energy auction. So, investors and developers are letting their feet do the talking with respect to the attractiveness of the renewable energy sector.
In July, the government announced the issuance of 100s of new North Sea oil and gas licenses. The reason for the UK’s continued backing of the North Sea oil and gas industry is part of the drive to make Britain energy independent. No one can fault the logic in this, but to effectively disincentivise investment in renewable energy means we are kicking the can down the road. A switch to renewables will not happen overnight. It takes time to develop wind farms and solar farms so the infrastructure needs to be getting in place now to be in a position to manage our energy security in the future. Of course North Sea oil and gas can provide a temporary source of energy in the interim, but this should not allow a hiatus on the development of alternative energy sources as per the current status quo.
According to a new study by Potsdam Institute for Climate Impact Research, Europe would have to spend $2tn on solar, wind and other renewable sources by 2040 to wean itself off fossil fuels. Some countries in Europe are committed to the required investment by implementing tax incentives. Such as the feed-in tariff (‘FiT’) scheme in Germany, which enables households in Germany that produce renewable energy at home to sell any excess to the national grid. Germany also provides homeowners with tax incentives for energy-efficient renovations.
Further afield, the US Inflation Reduction Act (IRA) arrived later than many other renewable energy initiatives, but it is so large in scope that it transformed the nation to a global leader in decarbonisation investment potential almost overnight. The IRA has made available nearly $400bn in federal funding across a wide range of sectors, mainly in the form of tax credits. China is the world’s largest investor in renewable energy, accounting for over 20% of the global total in 2022. China has set ambitious targets for renewable energy development, aiming to increase the share of non-fossil fuels in primary energy consumption to 25% by 2030 and 50% by 2050. China also offers subsidies, tax breaks and preferential tariffs for renewable energy projects.
In terms of what would be helpful to make the UK renewable energy sector a more attractive area for investment, there are a number of things the government could consider.
Given the rising cost of capital and the interest anti avoidance rules in the UK tax legislation, increasing interest deductibility on financing costs for qualifying green investments would be a good place to start.
A specific super deduction on capital assets falling within certain criteria would be another way to encourage investment in green technology and assets. The net could be narrowly drawn (eg just for developers of wind, solar etc assets) or it could be of wider application whereby any energy efficient plant qualifies for a permanent super deduction.
To incentivise the talent pool to work within the renewables sector a lower level of income tax (or income tax rebates) for employees working for qualifying renewables businesses would be an interesting way of stimulating growth within this sector. Effectively attracting the best of the best to work for renewables businesses.
The door was shut on renewables vehicles benefitting from Renewable Obligations Certificates (‘ROCs’) also enjoying tax relief status under the Enterprise Investment Scheme (‘EIS’) in the 2014 budget. This was preceded by the changes in 2012 whereby the EIS status of companies whose trade was substantially based on the receipt of the government’s feed-in tariffs, which pay households and companies for the energy they generate, being removed.
Given that these government subsidies are very much a thing of the past, in the brave new world of merchant risk renewables, it would seem appropriate to revisit the investment tax incentives for these types of investments. To stimulate investment within the renewables sector, the government could consider a similar package of incentives as the 30% income tax relief, after two years investments avail of an exemption from inheritance tax under business property relief (to the extent that still exists following the forthcoming statement). Capital gains tax-free after three years and capital gains tax deferral for up to three years.
A bit of tweaking of the EGL in the forthcoming statement would be helpful. Introducing measures similar to the Energy Profits Levy (‘EPL’) within the North Sea oil and gas regime, whereby within the EPL a new super deduction style relief exists to encourage firms to invest in oil and gas extraction. The government has been clear it wants to see the oil and gas reinvest its profits to support the economy, jobs and the UK’s energy security. Surely this should be extrapolated to electricity generators within the remit of the EGL? Providing renewables generators with an immediate incentive to invest with the sizeable carrot of the more investment a firm makes the less tax they will pay would help to stimulate the much-needed investment in this sector in order to meet the energy transition and energy security objectives.
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 for your renewables business, please contact Sheena McGuinness.