UK tax landscape: what needs to change to boost adequate renewables investment?

This article is written in collaboration with tax experts from RSM’s international network. 

Beware of snatching defeat from the jaws of victory

We are at a pivotal moment in the energy transition and the long-sought rise of renewables in the UK’s energy mix. The UK has performed well over the last decades. At the turn of this century, none of our electricity came from offshore wind, whereas wind accounted for 29.4% of the UK’s electricity generation mix in 2023. 

However, our lead, particularly in offshore wind, is at risk. Offshore wind is vital to the government’s climate targets, but the industry has been heavily impacted by price inflationary pressures. Industry figures suggest that the government has failed to adjust the scheme that guarantees the price it is paid for energy. 

Tax incentives will therefore play a key part in ensuring that the UK does not fall behind its counterparts in meeting its legally binding net zero targets. 

Tax is one of the most effective levers any government has at its disposal to shape behaviour. With that in mind, in this article, we explore green incentives in other countries and how the current lack of tax incentives in the UK might be impacting the attractiveness and investment in renewables in this country.

Regression in available subsidies

Following the changes to the Renewables Obligations Certificate Scheme (‘ROC Scheme’), the removal of the Levy Exemption Certificates (‘LECs’) and the changes to the Feed-In Tariffs Scheme (‘FIT Scheme’), there was a hiatus in renewable energy investment. This was coupled with the removal of renewable energy as a qualifying activity for Enterprise Investment Schemes (EIS) and Seed EIS, raising uncertainty over the UK government’s commitment to the green agenda.

However, over the last decade, developers and investors alike began to embrace merchant risk in the UK, and the sector has enjoyed growth and investment despite the removal of subsidies. Since then, there have been few, if any, incentives for the renewables industry specifically. For example, with the introduction of the Electricity Generator Levy (‘EGL’), which is a 45% levy on exceptional receipts of low-carbon electricity generators. 

The UK versus the rest of the world – how do we compare?

USA 

The United States retains the top global spot for investment in renewables amid significant solar growth driven by the Inflation Reduction Act (IRA) incentives launched in August 2022.

Kevin Foral, senior director at RSM US, comments:

The Inflation Reduction Act (IRA) is a federal legislation in the United States. It has expanded incentives and increases tax credits for all different types of green/clean energy, including solar, wind, geothermal, combined heat and power, biogas, nuclear, etc. From 2025, the IRA converts energy tax credits into emissions-based, technology-neutral tax credits available to all types of power facilities with zero or net-negative carbon emissions. The act earmarks $369bn for investment in clean technologies, and grants tax incentives across all different technologies and programs. 

Additionally, there are a number of state/local-level tax incentives for renewable energy in the United States that are separate and different from the IRA/federal credits and incentives.

Investment Tax Credit (ITC)

This credit allows for a deduction from federal taxes for a portion of the cost of installing a renewable energy system, such as solar panels.

Production Tax Credit (PTC)

This provides a per-kilowatt-hour tax credit for electricity generated by qualified energy resources and sold to an unrelated person during the taxable year.

Residential Clean Energy Credit

Homeowners can receive a tax credit for the installation of renewable energy systems, including solar electric and solar water heating systems.

Modified Accelerated Cost-Recovery System (MACRS)

Under this system, businesses may recover investments in certain property through depreciation deductions.

We have seen an uptick in interest in investment into the US from the UK since the IRA and ear marking of these funds to renewables initiatives. At a recent Energy Transition event at the Argentine Embassy, which Sheena McGuinness attended, the IRA was noted as a key incentive in the energy transition by both politicians, investors and analysts and demonstrates the important part that tax incentives have to play in shaping behaviour and reducing global carbon emissions.

Italy

Luca Grasseni, partner at RSM Studio Tributario e Societario, comments:

Italy aims to increase the number of renewables in its energy mix to 65% by 2030 and is implementing several measures to promote the use of renewable energy and support energy-intensive companies. One of the most important incentives for the energy transition is viewed to be the Renewable Energy Communities (“REC”), comprising €3.5bn allocated to RECs over the next 20 years. This is designed to incentivise local renewable electricity plants to serve nearby private or business consumers. It essentially doubles the present market value of electricity, so very attractive to investors and developers when assessing potential projects and encourages local consumption. Final legislation is still pending, but this is anticipated to be the most important incentive for the energy transition in Italy.

In addition, the Italian government has introduced an incentive mechanism for high energy consumption companies, whereby such businesses are being incentivised to build new or repower existing energy plants. These companies can purchase a portion of the electricity that will be produced by the new or improved plant three years before it goes into operation and pay the energy advance to the Italian management company for energy services (GSE) within 20 years of commissioning. This is in addition to the tax credits granted to large energy consumers. These credits accrue quarterly and can be offset against tax liabilities such as profit tax, regional tax and labour taxes. Tax credits, varying between 5% and 45% of the investment, are also afforded to investments in plants and equipment with IT connectivity to ERPs and fuelled with solar plants.

Finally, Italy is planning to set up a fund for regional initiatives aimed at encouraging decarbonisation efforts, promoting sustainable development, and accelerating and digitalising the approval procedures for renewable energy installations and their grid infrastructure.

Despite the complex tax landscape in Italy we have a number of UK head quartered clients that have developed renewable energy sites in Italy, so it is seen as an attractive place to invest for developers and investors in the renewables sector.

Germany

Dr Karsten Ley, tax partner at RSM Ebner Stolz, summarises Germany’s relevant incentives programmes:

Germany offers numerous incentives for investors with a stated aim that Germany, through the EEG 2023/24, will move to completely sustainable electricity generation with no greenhouse gas emissions. This is manifested through a number of incentives such as the form of feed in tariff still available in Germany whereby anyone who generates electricity with a solar installation, a wind or hydroelectric power plant or a geothermal and biomass plant and feeds it into the public grid receives a feed-in tariff with the aim of establishing alternative energies on the market and offering a financial incentive to switch to renewable energies. Depending on the form of energy, operators receive a certain amount per kilowatt hour of electricity today. Such a feed-in tariff runs for 20 years from the day the system goes into operation. Over this period, the operator always receives the same amount per kilowatt hour. This provides certainty over project profit projections, which is very attractive to investors. It is also worth noting that the German government introduced a similar levy to the EGL on consumer power bills, but this controversial surcharge was removed effective 1 July 2022.

Germany’s Federal Cabinet approved a government draft for the business plan of the Special Climate and Transformation Fund (CTF) with planned investment totalling €211.8 billion via the CTF. The purpose of the CTF is to make a key contribution to achieving Germany’s energy and climate policy goals, to developing and attracting forward-looking technologies, and thus to realising the transformation toward a sustainable and climate-neutral economy. This will be achieved through, for example, funding for energy efficient buildings, the financing of the EEG, the promotion of electric mobility, and ramp-up of the hydrogen economy. Funds have been allocated to these and other net zero activities from the CTF.

In the future, the aim is that ‘Made in Germany’ will also apply to many other important transformation technologies, e.g. the manufacture of solar systems. For this reason, Germany will also use the CTF in the future to promote investments for building the required production capacities.

Germany also offers a range of grants for investments, including grants for the Transition to a Net-Zero Economy. Eligible sectors include the production of batteries, photovoltaic modules, heat pumps, electrolysers, and equipment for carbon capture as well as the production or recovery of related critical raw materials required for the manufacturing of the relevant net-zero economy equipment.

Levelling up – putting the UK on an equal fiscal footing with other jurisdictions for renewables investment

Without significant change, the UK risks becoming a less attractive option for renewables and cleantech businesses compared to other geographical locations. For some, being located or headquartered in the UK is desirable as the overall tax landscape is stable with an excellent treaty network. However, for renewables and cleantech, other jurisdictions are more attractive in comparison to the UK tax regime.

We are starting to see the impact of the lack of specific fiscal incentives for businesses in the industry. For example, at a recent roundtable we held for the sector, senior finance roles reported that tax is not playing a large role in the ‘go/no go’ decision to proceed with an investment. Whereas, for example, clients in the US report that the IRA has materially impacted their decision making, with the availability of tax credits significant when modelling out potential investments.

Similarly, some of the previous tax incentives, such as the full expensing of capital expenditure in freeports (a hub of activity for offshore wind), are now being eroded as full expensing becomes available to all. The UK still offers some good reasons to invest, such as its R&D tax credits regime and its generous capital allowances, and the tax regime is not seen as a deterrent for renewables to invest in the UK. However, it would be helpful if there was a bit of fiscal fairy dust sprinkled on renewables investments in the UK (in the form of specific tax incentives) to give this sector a boost.

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