22 novembre 2022 Gitanjali Shankar  - Will Morton Energy and Infrastructure - ESG - Climate change - Renewables

UK Autumn Statement 2022 – Electricity Generator Levy

In the 2022 UK Autumn Statement (on which, see more here), one of the most significant measures announced for the energy industry was the electricity generator levy. This followed the enactment of the Energy Prices Act 2022 (see our original article here) (the “Energy Prices Act”), which is likely to provide the legislative basis for the levy (formerly known as the “revenue cap” or the “Cost-Plus Revenue Limit”).[1]

In this article, we discuss the further information released in the Government’s technical note regarding the electricity generator levy (the “Technical Note”) (see here) published on the day of the Autumn Statement and provide an updated overview of the key considerations that may be of interest to the relevant electricity generators in relation to the electricity generator levy.

Please get in touch if you would like more detail on the legislative and regulatory regime and how your business might be affected by it.

At a glance
  • Levy period: 1 January 2023 to 31 March 2028. [2]
  • Which sources of power generation are caught?: Nuclear, renewable and biomass which are transmission/distribution connected.
  • Which sources of power generation are excluded?: Gas, coal, oil, battery storage and pumped hydro storage technologies.
  • Assessed on a group basis: Corporate groups and joint ventures will be assessed as a whole.
  • De minimis: Only applies to groups generating more than 100GWh per annum from qualifying in scope generation assets.
  • Applicable revenues and size of levy: 45% levy on revenues above £75 per MWh for all qualifying generation receipts. The levy will not apply to the first £10m per annum of qualifying generation receipts.
  • Interaction with existing revenue regimes: Not applicable to revenues earned under CfD, Capacity Market payments and revenues from the sale of Renewables Obligation Certificates (“ROCs”). Further clarity is needed on the exact treatment of other revenues associated with power generation.
In more detail

We include below a summary of the initial information provided by the Government in its Technical Note, but note that the Government remains in discussion with relevant generators about the proposed model. There may also be other updates arising from further legislation that will be required to bring the levy into force. 

Effective period

The levy will apply to revenues generated from 1 January 2023 (without applying retrospectively to revenues generated before this date) and will be legislated to end by 31 March 2028. 

To whom does it apply? 

The Technical Note states that the levy will apply to corporate groups or (if relevant) standalone companies that undertake electricity generation in the UK and are connected to the national transmission or local distribution networks, including UK generators selling power via interconnectors. The implication from this is that private wire arrangements may well be excluded. The levy has been designed to cover electricity generated through joint venture structures with consideration given to the appropriate tax structures. However, it will be crucial to understand properly from the anticipated legislation how ‘corporate groups’ will be defined.

It remains unclear from the Technical Note:

  • whether the levy will affect all electricity generation assets of an in-scope electricity generator, or just the largest ones which breach the relevant thresholds. This could have the unintended effect of introducing the levy on smaller electricity generating plants simply on account of a sponsor having other, larger, electricity generating assets; and
  • the extent to which the levy is intended to target revenues of electricity generators purely in respect of the generated electricity (rather than in their capacity as sponsor affiliate offtakers and power hedging providers/traders). Those who are also perceived as benefitting from “extraordinary returns” may also be made subject to the levy.

To which generation technologies does it apply?

The levy will apply to groups generating electricity from nuclear, renewable and biomass sources in the UK (noting a de minimis threshold of groups generating more than 100 GWh per annum from in scope assets in a qualifying period) that are benefitting from a significant increase in the price received for their output without a corresponding increase in the cost of generation. 

The levy will apply to electricity that is generated in the UK and exported overseas, but not to electricity that is generated overseas and imported to the UK.

Notably, the levy will not apply to electricity that is generated under a contract for difference entered into by the generator with the Low Carbon Contracts Ltd (LCCC) or the sale of ROCs or revenue from Capacity Market payments. The possible exception to this is that under the Energy Prices Act, relevant generating stations that were subject to a contract for difference, but under such contract for difference, no payment had fallen due, were still counted as electricity generators (and so for these purposes may still be subject to the levy). 

It also appears from the Technical Note that the voluntary option to convert to a contract for difference is not being offered currently to generators who would otherwise be subject to the levy. 

The Technical Note does not confirm whether those generating electricity from sources other than nuclear, renewable and biomass (such as energy from waste) will be subject to the levy. Nor does the Technical Note confirm the exact treatment of other revenues associated with but not strictly from power generation, such as revenues from the sale of Renewable Energy Guarantees of Original certificates. 

In contrast to the approach taken with respect to the oil and gas levy, there does not appear from the Technical Note to be any investment relief applied to the electricity generator levy.

How does the levy work? 

‘In scope’ groups will be subject to a 45% levy on “Exceptional Generation Receipts” which are calculated as the aggregate revenue received across all of a group’s in scope UK electricity generation assets which achieves a price above £75 per MWh. If the electricity prices that the group receives falls below the benchmark price of £75 per MWh, then no levy would be due in respect of those amounts. The levy will not apply to the first £10m per annum that any ‘in scope’ group earns from UK electricity generation.

Next steps

The Technical Note is only indicative of the intentions of the Government. The Government will need to enact the levy via legislation, under its powers provided by the Energy Prices Act and/or any other legislation (if relevant). We understand that the Government intends to consult electricity generators on a number of outstanding points over the coming weeks, as well as publishing a draft of the applicable legislation in mid-December.

Implications and points to consider

We have previously outlined here a number of factors that electricity generators may want to consider as a result of the imposition of a cap or levy. We have updated these points to account for the new information regarding the levy in the Technical Note.

Project Documents: including construction contracts, operation and maintenance contracts, power purchase agreements, any power price hedging arrangements and contracts for difference will need to be carefully reviewed to identify any implications of the levy. We had previously noted a number of the following factors which electricity generators may want to consider, including: 

  • that the implementation of a levy could trigger change of law provisions in the project documents (e.g. power purchase agreements and contracts for difference). This is still a possibility, and will need to be reviewed on a case-by-case basis to understand whether any consultation, expert determination, compensation and/or termination rights may arise as a result of the introduction of the levy;
  • that a levy could affect revenue sharing arrangements and/or warranties contained within some of the construction and operations contracts. As the levy is being introduced with the aim of targeting “returns”, this consideration is still valid and will require a review of project documents for any such arrangements and warranties;
  • that electricity generators may be affected by any power price hedging arrangements (including any price collar or fixed pricing under route-to-market or corporate power purchase agreements) they had entered into. This will clearly depend on the nature and terms of such arrangements – for example, any generators that have entered into virtual power price hedging arrangements may be concerned about the possibility that they may have to surrender the excess revenue to the hedging provider whilst still being liable to also pay the levy on any revenue (as opposed to profit) over the benchmark; and
  • some of the real estate arrangements such as leases my require payments that are linked to the relevant electricity generator’s revenues. Similar to the power price hedging arrangements above, the impact of the levy on the electricity generator will depend on the applicable terms of any such real estate arrangements.

Financing Documents: the terms of the finance documents for the electricity generators should be carefully reviewed to check for any implications of the introduction of the levy. We had previously noted a number of the following factors which electricity generators may want to consider, including:

  • the introduction of the levy could be considered a “change of law” in the financing documents. This will need to be considered on a case-by-case basis to assess whether, under the terms of the financing documents, it may cause a reduction or blocking of distributions, which in turn could cause a technical financing default and/or possible debt resizing or mandatory prepayment;
  • the treatment of the levy in the finance documents, particularly as to ranking of any associated payments and any consequential requirements for reserving, will need to be carefully considered;
  • the introduction of a levy could also be considered a “material adverse change” (or similar) in the financing documents, depending on how it is defined in the documents. Such a “material adverse change” could, under the terms of the relevant financing documents, have similar consequences as those for change in law noted above including distribution block and default;
  • many of the consequences on other documents noted above may in turn have consequences in the financing documents – for example, any potential termination of the power purchase agreements due to the change in law would likely trigger a financing default. This still remains the case and will require an in-depth review of the full suite of finance documents to assess the impact of the levy; and
  • there may also be implications on the coverage ratios following the implementation of a price cap or levy. Following the Technical Note, it remains a valid consideration that, as a result of the increased payments caused by the levy, electricity generators should assess how their coverage ratios may be affected. It should also be considered whether the ratios can be retested and if so, how these might affect any financing arrangements. Electricity generators may also want to review their financial model(s) to re-assess the assumptions made in relation to the anticipated power price for the electricity generated.

Equity Documents: if an electricity generator was subject to any M&A transaction, the sponsors may wish to review the terms of the sale and purchase document(s) following the announcement of this levy. For example, depending on the terms of the sale and purchase document(s), in certain circumstances there may be potential recourse to the vendor (e.g. by way of adjusting the sale and purchase price) as a result of the introduction of the levy. 

Bilateral investment treaties: some parties may wish to explore whether it would be possible to seek protection from the introduction of the levy under a bilateral investment treaty entered into between the Government and another country. There will be various structuring, contractual and regulatory factors to take into account in this regard, and please get in touch if you would like to explore these further.

We continue to closely monitor developments in relation to the levy, the Energy Prices Act, the Finance Bill and any other relevant legislation, noting the legislation is expected to be published in mid-December. The applicability of the levy and its effects will vary dramatically depending on electricity generators and project specifics. We are continuing to actively engage with key players in the energy industry to ensure that we are best placed to assist with any developments in the market. We are happy to speak with you at any time to assist with any queries you may have.


 

[1]    The Autumn Statement appeared to suggest that the electricity generator levy would be legislated for in the Spring Finance Bill 2023 (the “Finance Bill”). The Finance Bill was introduced to Parliament on 22 November 2022, however the Finance Bill as presented and its accompanying explanatory notes only cover matters such as the oil and gas levy, the dividend nil rate and removal of vehicle excise duty. Notably, the electricity generator levy is not included. As such, it still appears likely that the Energy Prices Act rather than the Finance Bill will be the primary legislation for the purposes of the electricity generator levy.

[2]    We note that the Energy Prices Act states that the Secretary of State’s power to require electricity generators to make payments (such as via this levy) will expire after a period of five years following the date of the Energy Prices Act. This limit will have to be extended via primary legislation (possibly by amending the Energy Prices Act) to enable the levy to continue until 31 March 2028, as it would otherwise be limited to ending on 25 October 2027.