Renewable energy's next big challenge: decommissioning costs & ESG

Decommissioning refers to the safe dismantling of equipment and restoration of land at the end of an energy project. But, what are the key accounting, tax and ESG implications of this process?

The growing cost of decommissioning

The share of renewables in global energy capacity expansion increased from 85.8% in 2023 to 92.5% in 2024. Government and organisation sustainability goals, along with net-zero targets, continue to attract significant investment.

Wind turbines have a typical life of 20–25 years, solar panels can last approximately 30 years (although their performance deteriorates on a gradual basis), and battery storage sites need to be replaced as their capacity decreases through usage. Indeed, one-third of the UK’s offshore wind farms will reach the end of the originally anticipated operational life within 10 years.

Alongside the net-zero target, the UK’s Energy Gap, the amount that demand outstrips production capacity, means that government strategy is focused on driving up renewable energy supply. The recently released Clean Power Action Plan projects an investment of £40bn per year into clean homegrown energy. However, regulation for the decommissioning of renewable sites is in its relative infancy.

How decommissioning affects financial reporting and ESG disclosure

Investors expect energy businesses, particularly those in the renewable space, to be at the forefront of sustainable practices and corporate reporting. The UK’s anticipated Sustainability Reporting Standards (SRS), aligned with the International Sustainability Standards Board’s (ISSB) IFRS S1 and S2, mark a significant enhancement to current sustainability reporting requirements in the UK.

While the specifics of the UK Sustainability Reporting Standards (SRS) have not yet been released, companies are expected to expand their disclosures beyond the Taskforce on Climate-related Financial Disclosures (TCFD) framework. This expansion will likely include a broader range of sustainability-related risks and opportunities—such as decommissioning and end-of-life infrastructure management—and how these factors impact their financial position, strategic resilience, and operations. These enhanced disclosures are anticipated to play an increasingly significant role in influencing external investment decisions and access to finance, while also drawing greater regulatory scrutiny.

Jake Salpeter, ESG & Sustainability and Industrials lead said: “In the energy and renewables industry, stakeholders and regulators are prioritising enhanced sustainability disclosures with a focus on disclosing decision-useful information that is company-specific. As the market continues to mature, it is expected that incoming regulations, such as the UK SRS, will only enhance and broaden this focus to start reporting on not just enhanced climate-related information, but the full suite of sustainability-related risks and opportunities that companies are exposed to. The companies we support are continuously looking to improve their disclosures year-on-year, and the UK SRS will only set the bar higher for robust sustainability disclosures.”  

The legal obligations to decommissioning sites in a responsible manner are not always clear for renewables businesses. The regulatory environment is, in some respects, in its infancy and will evolve quickly as more assets reach retirement age in the coming years. For nuclear operators, the 2008 Energy Act mandated a Funded Decommissioning Programme to ring-fence resources and regulation is more mature. For wind turbine and solar operators, the accounting practices they adopt will signal to stakeholders that they have appropriately assessed future liabilities as part of their long-term strategic plans.

Why tax policy is lagging behind renewable energy growth

In the oil and gas industry, the Decommissioning Relief Deed provides certainty for companies operating in the UK and on the UK Continental Shelf regarding the tax relief they will receive when decommissioning assets. Renewables operators need access to a similar contract to provide certainty for businesses and to incentivise responsible practices.

Government support through appropriate tax legislation remains limited, which deters investment, particularly from the private sector. This is at odds with one of the primary goals of Great British Energy: to attract such investment.

Sheena McGuinness, Co-Head of Energy and Natural Resources said: “We are seeing a shrinking tax base in respect of North Sea oil and gas and fuel duty receipts. The most recent data on the former showed a 26% drop in tax revenues on the previous quarter. This also reflects the shrinking profitability and capability for businesses to make investment decisions, which may lead to budget shortfalls, impacting the funding government has earmarked for public spending and infrastructure projects, including GB Energy. Given the Energy Profits Levy has been extended to March 2030, with government also increasing the rate to 38%, the increased tax burden on businesses will continue to influence decision-making and create more caution in the energy market, with further diversion of investment capital and revenue falls anticipated.

We are still awaiting clarity on how GB Energy will help to stimulate clean energy generation and boost the UK economy by creating new skilled jobs and shoring up our supply chain, which will help to address some of the challenges around long-term planning and investment. However, this shift won’t happen overnight, and it’s unlikely that we’ll see GB Energy outperform the private sector any time soon, so in the short term, increased borrowing is likely to fund any shortfall, widening the budgetary deficit.

The government must outline its clean energy policy in the industrial strategy, focusing on key energy sources, investment, and tax incentives to ensure long-term economic growth.”

Planning ahead: decommissioning strategy and ESG accountability

Decommissioning corporate policies and financial reporting present an opportunity to demonstrate environmental stewardship and investor-grade transparency in the face of growing ESG demands.

Early planning reduces the risks of significant unexpected liabilities and potential regulatory scrutiny. The government must also play its part through appropriate tax incentivisation, given the strategic importance of continued renewable investment to achieve its sustainability and energy goals.

How we can help your energy and natural resources business

We have extensive experience in the energy and natural resources industry, working with clients in various sectors, including oil and gas, renewables and cleantech, and mining and metals. We are committed to supporting businesses in the industry.

If you would like to discuss the impact for your energy and natural resources business, please contact David Hough, Sheena McGuinness or your usual RSM contact.