Autumn Statement: Changes to the energy windfall taxes

An EGL exemption for new electricity generation projects and permanent removal of EPL once certain hydrocarbon price levels are met

EGL and EPL reform

A number of announcements have been made on the taxation of energy investments in the UK. Firstly, an exemption from the Electricity Generator Levy (EGL) applies for new investments in electricity generation which reach Final Investment Decision (FID) after 22 November 2023. Secondly, final details of the Energy Security Investment Mechanism (ESIM), which sets out criteria for a permanent removal of the Energy Profits Levy (EPL), have been released. There is also confirmation of the intention to introduce legislation on ESIM. Thirdly, to provide medium to long term fiscal certainty for the oil and gas sector, the Government will consider a new mechanism setting out how it will respond to future price shocks after the EPL has ceased. Lastly, legislation will be introduced which aims to remove some of the tax barriers that arise from the repurposing of UK oil assets for use in Carbon Capture and Storage (CCS) projects.

The four measures discussed below aim to reduce the impact of windfall taxes and provide fiscal certainty to investors. 

EGL – New Investment Exemption

EGL was introduced in 2022 as a windfall tax for non-fossil fuel electricity generators to tax ’extraordinary’ returns. On the day of the Autumn Statement, an exemption was announced for generation receipts from new investments in electricity generation where the ’substantive decision to proceed’ (i.e. FID) is reached after 22 November 2023. The exemption will also apply to additional receipts arising from an increase in the generating capacity of the generating station. Draft legislation will be published shortly in advance of inclusion in the upcoming Finance Bill. 

EPL - Energy Security Investment Mechanism (ESIM)

Following announcements in June and subsequent consultation, the terms of the ESIM have been announced. The ESIM sets out criteria for a permanent removal of the EPL (the windfall tax on UK oil and gas production introduced in 2022).

The ESIM will trigger if reference prices, calculated as the average commodity price over a six-month period, for both oil and gas are at or below the ESIM threshold price. The threshold price for 2023 is $71.40 per barrel for oil and £0.54/therm for gas. Where triggered, the EPL will cease to apply from the final day of the relevant reference period. Legislation will be included with the upcoming Finance Bill. 

EPL – Carbon Capture and Storage (CCS) investments

Legislation will be introduced which aims to remove some of the tax barriers that arise from the repurposing of UK oil assets for use in CCS projects. Two matters are to be addressed:

  • The introduction of relief for payments made by oil and gas companies into decommissioning funds; and
  • The removal of certain receipts from EPL, described as “receipts from the sale of oil and gas assets which are repurposed for use in CCS”.

Oil and Gas Fiscal Review

A summary of responses from this year’s consultation has been published along with the Government’s response. It includes:

  • Confirmation that EPL will end in March 2028, unless the ESIM applies;
  • The development of a new measure that will set out how the Government will deal with future ’price shocks’. The aim is to ensure a fair return to the taxpayer whilst providing fiscal certainty; and
  • Maintenance of the existing incentive regime applicable to UK oil and gas production.