Draft legislation published for the Electricity Generator Levy

The Energy Generator Levy draft legislation contains significant updates to November’s policy announcement.

EGL legislation – policy announcement update.

Draft legislation published on 20 December 2022 contains details on how the Electricity Generator Levy (EGL) will apply to groups and Joint Ventures (JVs), as well as policy updates such as a reduction of the threshold, indexation of the benchmark price and the ability to deduct certain exceptional costs.

EGL is applicable to the revenues of certain low carbon electricity generators and is charged at 45 percent on revenues above £75 per MWh from 1 January 2023. Further details can be found in our previous article: Chancellor announces new energy windfall taxes.

Policy updates

The draft legislation contains a number of policy updates including:

  • A reduction in the generation threshold to 50 GWh per annum from the original 100 GWh;
  • An inflationary increase to the £75 MWh benchmark price from 2025 by reference to the CPI measure of inflation;
  • There is the ability to deduct limited expenses, including:

o   Exceptional fuel costs above a baseline based on actual costs from 2017 to 2020;

o   Revenue sharing costs e.g. landfill access arrangements; and

o   Qualifying electricity purchase costs fulfilling contracted output arrangements.

  • Clarification of in scope revenues:

o   Behind the meter generation not exported and storage related revenues are not in scope; and

o   Gains and losses on hedging financial instruments and payments under options or derivatives under a virtual power purchase agreement are within scope.

Groups and JVs

EGL is calculated by a group, defined as the ultimate parent (‘the principal company’), its 75 percent subsidiaries, and 75 percent subsidiaries of those subsidiaries. Any EGL liability will fall on a single group company, the ‘lead member’. Other companies in the group will be jointly and severally liable.

JVs will be looked at independently of their shareholders for EGL purposes, unless an election is made. Any of the £10 million allowance used by the JV, as well as amounts generated from selling or hedging the JV’s output is included within the shareholder’s EGL liability.

Non residents

EGL appears to apply to non-residents e.g. non-resident JV shareholders or non-residents hedging or selling in scope generation. The application of double tax treaties to EGL is an area for further assessment.

Next steps

Electricity generators should now be better equipped to assess EGL’s impact.
Payments are due in line with corporation tax payments, however no payments are required until Royal Assent.

There are a number of areas where HM Treasury are still considering options and are open to feedback, especially with regard to JVs. Electricity generators should therefore monitor changes to legislation as it comes before Parliament.