The National Budget: Taxation on Onshore Wind Power
The Norwegian government proposes to introduce the contentious resource rent tax on onshore wind power from 2024, with a proposed effective tax rate of 35 %. Existing wind power facilities are included in the proposal. There are suggested transitional measures, which may not be sufficient to prevent serious economic consequences for the existing facilities.
The government proposes to introduce a 35 % resource rent tax on onshore wind power starting in 2024, following the consultation paper of December 16, 2022. The consultation proposal faced significant opposition from the industry, especially from owners of existing wind power facilities. After the consultation the planned commencement date was postponed from 2023 to 2024.
The proposed tax is structured as a cash flow tax with immediate deductions of new investment costs, and the resource rent income is generally calculated based on spot market prices, with some exceptions. Deductions will be allowed for operating expenses, investment costs, property tax, and a resource rent-related corporate income tax. The resource rent tax will apply to all wind farms which require a license under the Energy Act..
Despite strong objections, existing wind power facilities are also subject to the proposed resource rent tax. As a transitional measure, it has been proposed that initial value of historical investments can be calculated based on the ordinary depreciation rules for all existing wind power facilities. This also includes those that have utilized accelerated depreciation rules.
Additionally, existing wind power facilities will be compensated for the depreciation of the initial value of historical investments over time through a deduction for a lift-up rate. The government also proposes that when calculating the resource rent tax income, existing physical and financial price hedging agreements, which were entered into before September 28, 2022, should be considered. The same conditions should apply to all power supplied under purchase agreements entered into between 2024 and 2023, and for standard fixed-price agreements for end-users. Long-term contracts (PPAs) concluded after 2030 will not be covered by the considerations.
In the event of a negative resource rent income, the government does not suggest to make any payout of the tax value, as advocated by several parties during the consultation. Instead, income from negative resource rent may be carried forward using a risk-free interest rate. It will be deducted from any future positive resource rent income in accordance with the consultation proposal. Unlike with hydroelectric power, there is no option to consolidate resource rent income between multiple facilities.
The government plans to increase the production tax on onshore wind power to 2.3 Norwegian øre/kWh, while the proposal to introduce a natural resource tax will not be continued. The production tax will be deducted, per Norwegian krone (NOK), from the assessed resource rent tax and will provide the host municipalities with income from resource rent activities located in their area.
Furthermore, the government proposes to abolish the windfall tax (high-price contribution) for both hydroelectric- and wind power production, with retroactive effect from October 1, 2023.
Resource Rent and Background for the Proposal
Resource rent is an extraordinary profit derived from the exploitation of natural resources. In the consultation proposal for the introduction of a resource rent tax on onshore wind power, the government argued that onshore wind power production could generate resource rent. They also argued that the introduction of a resource rent tax would be necessary to ensure that a greater share of the value created by the exploitation of our common natural resources are allocated to the community.
The proposal faced substantial criticism from various parts, with some arguing that onshore wind power production does not give rise to resource rent. Several consultative bodies referred to KPMG's report on the consequences of the proposal, «Konsekvenser ved innføring av grunnrentebeskatning for landbasert vindkraft», in which KPMG's analysis showed that there is far from any resource rent in onshore wind power production. The government also referred to KPMG's report in its final proposal, and has to some extent moderated its stance, compared to the consultation proposal. It is stated that onshore wind power production over time can generate resource rent, in part due to the long-term development in price and cost levels, favorable wind conditions in Norway, and the limited availability of suitable wind power locations, which are subject to licensing.
KPMG has surveyed the taxation of wind power production in other countries in the report «The wind of change (kpmg.com)». If the proposal for resource rent taxation is adopted, Norway will become the number one jurisdiction in the world that taxes wind power production most heavily.
Calculation of Resource Rent Income
The resource rent tax will be structured as a cash flow tax, following the current regulations for hydroelectric taxation, with direct deductions for investments in the year of investment.
The resource rent income will generally be based on spot market prices, except for power production tied to existing physical and financial fixed-price contracts entered into before September 28, 2022, and standard fixed-price agreements, similar to that for hydroelectric power. In the final proposal, there are also exceptions for long-term physical power contracts for projects established between 2024 and 2030 entered with unrelated parties. The tax base should be calculated based on the value of actual production at each wind power facility in the income year, including revenues from electricity certificates and guarantees of origin.
Deductions will be made for operating costs, investment costs, property tax, and resource rent-related corporate tax. Deductions for historical investments will be calculated based on the initial value of existing wind power facilities, using the ordinary depreciation rules, even for wind power facilities subject to accelerated depreciation rules. For taxable entities that have not depreciated their assets at maximum depreciation rates, the government will counteract adjustments by proposing that the initial value be reduced as if the maximum depreciation rates were used.
Furthermore, existing wind power facilities will be compensated for the depreciation of the initial value of historical investments over time through a deduction for a “wait interest”. It is proposed that the wait interest be calculated based on the remaining value at the end of the previous income year, multiplied by the risk-free interest rate, adjusted for the tax on ordinary income. According to the government, this will ensure that the present value of the depreciation and wait interest will correspond to the value of the direct deduction for the initial value in 2024. However, the lift-up rate (“exempt income” or “wait interest”) is likely to have limited practical significance for the oldest wind power facilities that already have low remaining tax values. The lift-up rate deduction will only be included in the calculation of the resource rent income, not in the special deduction for resource rent-related corporate tax.
The effective resource rent tax rate was initially proposed at 40 % in the consultation proposal but has now been lowered to 35 %. Half of the tax revenues will go to the municipal sector. Resource rent tax liability will apply to all wind power facilities subject to licensing under the Energy Act.
In contrast to resource rent taxation for hydroelectric power, where the tax value of negative resource rent income is paid out, the government plans to carry forward the calculated negative resource rent income with interest and potentially deduct it from future positive calculated resource rent income in line with the consultation proposal. This lack of payment for negative resource rent income received strong criticism during the consultation and means that the regulations will not be neutral compared to hydroelectric taxation.
To contribute to further stability in income to the municipalities, the government increases the production tax allocated to the host municipalities from 2 øre/kWh to 2,3 øre/kWh. Accrued production tax will be deductible, per krone, from the determined resource rent tax starting in 2024. The proposal to introduce a natural resource tax in addition to the production tax will not be continued.
It is proposed that the municipal sector will be granted an extra allocation this year with high resource rent revenues. According to the government, at least half of the resource rent tax revenues will go to host municipalities through the increased production tax and the additional allocation in high resource rent years.
Abolition of High-Price Contribution
With the justification of redistributing extraordinarily high incomes from power production, a high-price contribution was introduced for hydroelectric and wind power in the 2023 budget. The high-price contribution is calculated as 23 % of the average electricity price per month that exceeds 70 øre/kWh.
The government proposes in this year's budget to abolish the high-price contribution with retroactive effect from October 1, 2023. The government believes that the extraordinary situation we faced last fall no longer applies to the same extent.