In the first article of our series, Tax in 2024 for the future energy sector, the TLT Tax team considers the Electricity Generator Levy (EGL) in the context of the recently announced investment exemption.

What is the EGL?

It's a tax, introduced from 1 January 2023, which is charged at 45% on the exceptional generation receipts of electricity generating businesses (referred to in the legislation as "generating undertakings"). 

Why was the EGL introduced?

In response to a rise in global electricity prices, in May 2022 the government announced a cap on the amount charged for electricity to support householders and businesses with the rising costs of living. 

The high cost of electricity led to many UK generators receiving greatly increased revenues, in excess of normal commercial returns. Consequently, the government announced the introduction of the EGL at the Autumn Statement 2022 with the objective of taxing those excess revenues.

Is the EGL a permanent levy?

No, it is a time-limited tax and will apply until 31 March 2028.  However, there is a possibility that the levy may end sooner - HMRC has stated that if electricity prices were to fall below the benchmark price prior to the end date, the government would consider the ongoing application of the EGL.

Which businesses does the EGL impact?

The EGL applies to any single company that operates a “relevant generating station”, being a generating station that generates electricity in the UK other than:

  • from the burning of oil, coal or natural gas or from the use of plant driven by water; or

  • under a contract for differences with the Low Carbon Contracts Company or certain other specified arrangements.

It also applies to any group of companies which includes at least one company that operates a relevant generating station. A “group of companies” for these purposes comprises (i) the ultimate parent; (ii) its 75% subsidiaries; and (iii) the 75% subsidiaries of those subsidiaries.

If the company, or group of companies, generates over 50 GWh per year, the EGL may become payable.

What if the new investment exemption doesn't apply?

If the exemption doesn't apply, an electricity generating business will need to consider if the EGL applies to it.

However, not all electricity generation is within the scope of the EGL. It only applies to electricity generated for export to the transmission network or the local distribution network. The EGL does not apply to:

  • electricity generated and used under a private wire arrangement;

  • "behind the meter" generation that is not exported;

  • revenues from storage (including battery technologies, pumped hydroelectric storage, and innovative storage technologies such as hydrogen); or

  • grid stabilisation (except for hybrid assets).

What is the new investment exemption?

The new exemption has been introduced to encourage renewable energy generators to expand to protect the UK’s energy security and promote the adoption of renewable energy.

As a result of the new exemption, provided certain conditions are satisfied, receipts from electricity generated by new generating plant will be treated as generated by a separate generating station. These receipts will not be taken into account in calculating the amount of EGL payable by a generating undertaking.

The draft legislation implementing the exemption is contained in the Finance Bill 2024. 

When does the new investment exemption apply?

The exemption will only apply if:

  • the new generating plant was commissioned as part of a “qualifying project”; and

  • on 21 November 2023 there was a “significant likelihood” of the project not proceeding.

A “qualifying project” is a project to commission new generating plant:

  • for a new generating station;

  • for an existing generating station which (because of the project) is to be wholly or substantially comprised of new generating plant; or

  • that increases the generating capacity of an existing generation station.

For a new generating station, the exemption will apply to the whole of the generation receipts from that station. For an existing station, only receipts which are attributable to the additional capacity (calculated on a fair and reasonable basis) will be subject to the exemption.

What is a "significant likelihood" of a project not proceeding?

There is no definition of “significant likelihood” in the draft legislation. However, the explanatory note accompanying the draft legislation states that a significant likelihood of a project not proceeding indicates that at the specified date there is a more than a small, negligible, or fanciful risk the project will not proceed.

A technical note issued when the exemption was announced in November 2023 states that objective factors should clearly point to whether there was a significant likelihood of a project not proceeding. Factors may include:

  • a main board level commitment to undertake the project;

  • an approval of the total financial commitment required for the project;

  • the commitment to contracts regarding generating equipment and installation activity; or

  • the approval of a credible timetable or programme for the project demonstrating that the facility can reasonably be expected to be commissioned.

What will be treated as increasing the generating capacity of an existing generating station?

For the exemption to apply to an existing generating station which is increasing its generating capacity, the undertaking will need to demonstrate expansion of generation infrastructure – evidence of increased generation output by a generating station will be insufficient.

If the undertaking can show that:

  • expansion is beyond the former boundaries of a site; or

  • a new interest in land has been obtained;

then it's possible the additional capacity will be treated as a separate generating station and the exemption could apply to it.

The limited HM Treasury commentary notes that the provision of separate metering of the resulting additional output would be an indicator of a separate project (but not determinative).

Activities such as repair, refurbishment and maintenance of an existing generating station which result in the operation of the station beyond its originally planned life will not fall within the exemption.

TLT comment

The introduction of the new investment exemption will be welcomed by electricity generators. However, the current lack of detail relating to the application of the exemption is unhelpful. It is hoped that HMRC guidance will be published to provide much needed clarity.

Companies wishing to rely on the investment exemption will need to carry out an assessment of the decision-making process relating to the commissioning of new generating plant to evidence that, on 21 November 2023, there was a significant likelihood of the project not proceeding.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Date published

19 February 2024


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