This article was written by Gemma Nicol, Trainee Solicitor.
Why has the Levy been introduced?
The market price for UK-generated electricity stems from the marginal cost of (currently) the most expensive form of electricity generation needed to meet UK demand - which is gas.
As the demand for energy increased last year after COVID-19 and supply has been constrained as a result of the Russian Invasion of Ukraine, the UK Government predicts that prices and, in turn, profits for oil and gas producers will remain high.
As the wholesale price of gas has risen so too has the wholesale market price of electricity, which in turn has allowed electricity generation companies to generate "extraordinary returns" and benefit from increased output prices - without the corresponding generation cost increases gas producers are experiencing. It is these profits that the Levy is designed to address.
Who does the Levy apply to?
The Levy applies to either a company or a group of companies that:
a) generates electricity in the UK (whether they sell electricity in the UK or export it) from either:
a) nuclear;
b) renewable; or
c) biomass sources (including energy from waste); and
b) is connected to a local distribution network; or
c) is connected to a national grid.
What does the Levy mean for electricity generators?
The key operative parts of the Levy are that:
- it will be limited to generators generating more than 50 Gigawatt-hours (GWh) per annum of electricity from nuclear, renewable or biomass sources in any qualifying period;
- "extraordinary returns" is set at benchmark price of £75 per MWh - meaning any generators' earnings above this level will be subject to the Levy;
- there is a £10 million per annum allowance set - meaning the Levy will only apply to extraordinary returns exceeding this;
- the Levy will not be deductible from profits subject to Corporation Tax, bringing the cumulative rate on profits over £75 per Mwh to 70% - a high rate of tax for these large-scale generators;
- a group principally consists of the ultimate parent, known as the principal company, its 75% subsidiaries and the 75% subsidiaries of those subsidiaries; and
- a company is a qualifying joint venture if it is not a member of a group (other than a group of which it is the principal) but it is 75% owned by five or fewer participators (a participator is any person having a share or interest in the capital or income of the company). However, it has been noted that the joint venture provisions will need to be refined before the final legislation is published in March 2023 and is still being consulted on.
How has the market reacted?
Whilst the UK Government expect the Levy will raise over £14 billion in five years, its introduction still comes with some challenges:
- Gas, oil, and coal generators will not be subjected to the Levy – this has led to widespread concerns that the Levy will de-energise and damage investment into UK renewable energy whilst less sustainable options will not be affected by the increase in tax payable.
- There is a concern amongst large financial providers that the Levy will affect their borrowers ability to meet financial covenants and service finance costs, ultimately affecting the return of the project. This could affect the availability of future funding for large-scale generators and further impact on the UK renewable energy market.
- HMRC have yet to publish guidance on the Levy and it is expected to be included in the next Finance Bill (likely to be published mid-March 2023). The draft legislation published contains changes to the policy since the Chancellor introduced the Levy in the Autumn Statement. Such changes include halving the generation threshold from 100 GwH per annum to 50GwH. Also, whilst the draft legislation recognises that the Levy will apply to joint venture arrangements, the Government have made it clear that they are still in consultation on these provisions, which will be refined before the publication of the final legislation. This all leaves room for uncertainty in the run up to March before generators can be certain of the impact of the Levy on their business.
Those affected will also be watching with interest to see if there are any changes, or new announcements, made at the UK Budget on 15 March 2023.
If you require any advice on the implications of the Levy for your business please contact a member of our tax team, or your usual DWF contact.
