What is it?

The UK government has announced that it will be imposing a new temporary Electricity Generator Levy (EGL) of 45% on the extraordinary revenues of low carbon electricity generators. The EGL will replace the Cost Plus Revenue Limit and will be effective from 1 January 2023, and is intended to end by 31 March 2028.

Given the rise in the rate of corporation tax to 25% in April 2023, this will result in an overall headline rate of 70%.

Which generators will this apply to?

The EGL will apply to corporate groups or (where relevant) standalone companies that undertake electricity generation in the UK from nuclear, renewable and biomass sources and are connected to a national grid or local distribution networks. This presumably means that private wire supplies are out of scope, although the exact parameters of this exclusion are unclear (e.g. in the context of a private wire project that spills excess power onto the grid). The EGL will be limited to groups that generate more than 100 GWh per annum of electricity from in scope generation assets.

Administering the EGL

The EGL will be charged on generation receipts above a benchmark price of £75 per MWh and will be subject to an annual group allowance of £10m. It will be administered in the same way as corporation tax, i.e. the company responsible for administering the EGL for the group will need to include the relevant amounts in its corporation tax return and pay the EGL in line with its normal payment dates for corporation tax (including under the quarterly instalment payments regime, where appropriate).

Revenue Measure

The EGL will cover revenue from electricity generated in the UK (whether sold in the UK or exported) via all potential routes to market, including purchase power agreements, long forward contracts and trading within the day-ahead and intra-day markets. It will also take account of:

  • Revenue from accepted balancing market offers;
  • The net impact of imbalance settlement; and
  • 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.

As this is a revenue based levy, there are no plans to allow any additional costs to be taken into account when calculating extraordinary generation receipts.

Is anything out of scope?

The EGL will not be applied to electricity generated under a contract for difference entered into with the Low Carbon Contacts Company Limited or to pumped storage hydroelectricity or battery storage. Revenue earned from the sale of Renewables Obligation Certificates or capacity market payments will also be out of scope.

What next?

  • The Government has published a Technical Note which gives an overview of the design of the EGL. However, many of the details are unclear at this stage and will need to be carefully considered when the legislation is published. Draft legislation is expected in mid-December.
  • The Treasury and HMRC are open to discussion with the industry on the implementation of the EGL. Generators that think they may be within scope of the EGL are encouraged to get in touch at [email protected].

Top things to consider at the moment

  • How will any revenue sharing provisions in your executed project contracts be impacted by the above? For example:
    • EPC Contracts which deduct PPA revenues received by generator from delay delay liquidated damages payable by EPC contractor;
    • Share Purchase Agreements which adjust share purchase consideration based on a project valuation that uses PPA revenues.
  • Would the legislation that introduces the above levy be classified as a qualifying change in law in any of your project contracts, potentially triggering a right to adjust the contract price to share the impact of the levy? This is likely to be most relevant in PPAs but also possibly in EPC or O&M Contracts where contract prices may have been formulated based on expected project revenues before this levy. We note that often taxation changes in law are excluded from being qualifying changes in law.
  • For project contracts you are negotiating at the moment, consider that this upcoming change in law is now likely to be foreseeable and therefore may not be a qualifying change in law.
  • If you think you may be entitled to a price adjustment under your project contracts (whether through change in law or Change procedure or a material adverse change clause) carefully check your notification obligations to make a claim. Very often these obligations are conditions to making a claim.
  • The levy applies to receipts from in scope electricity generation. In longer term private wire or offsite corporate PPAs, very often the capital costs of building the generation plant are amortised and recovered under the PPA over its term. Would repayment of such capital costs under a PPA count as a receipt for electricity generation?
  • The levy applies to corporate groups or standalone companies that are connected to the national grid or distribution network. Many private wire projects either have a separate independent grid connection or connect to the grid by upgrading the offtaker’s existing grid connection. Would all revenue (including private wire revenue) be subject to the levy on these projects, or solely the revenue from any power exported to the grid?
  • Revenue from Renewable Obligation Certificates is excluded from the levy, but other revenue for sale of other certificates such as REGOs is not mentioned. Often there is a £/MWh value assigned to REGOs in PPAs – will this revenue be excluded or included?