How UK green generation can ready for the Electricity Generator Levy
Published on 31st Jan 2023
The government intervention has implications for PPP authorities, fund managers and investors as well as generators
The chancellor's Electricity Generator Levy announced as part of the Autumn Statement in November last year has attracted a lot of attention for the 45% tax being imposed on "extraordinary returns" on renewable generation in the UK.
While the headline focus has been on the tax rate, the proposed levy has significant implications not just for renewable generators but also for public-private partnership (PPP) authorities, fund managers and both majority and minority investors.
Not just PPAs and CfDs
An obvious starting point to assess the implications of the levy is to look at whether it triggers change-of-law provisions in power-purchase agreements and contracts for differences, but it is important also to check engineering, procurement and construction contracts and operation and maintenance contracts as well as any concession or project agreements with a local authority or other public body. Revenue sharing agreements, price reopening mechanisms, hedging arrangements or any other contract provisions concerning revenues could be affected by the levy.
Any potential consequences of a change-in-law provision, including compensation, termination rights or expert determination, should be assessed on a case-by-case basis. Foreseeability exclusions are often carved out of change-in-law provisions, so whether the levy was foreseeable at the date of contract will also need to be considered as should any notification requirements.
What's a group?
The headline position is that the levy is calculated at group level: a group being the ultimate parent, its 75% subsidiaries, and 75% subsidiaries of those subsidiaries. However, there are separate provisions where a company – the joint venture (JV) – does not form part of a group as a shareholder but is 75% owned by five or fewer persons: the JV will first be subject to the levy in its own right. Its material shareholders (with at least 10% ownership) will then be taxed on untaxed qualifying generation receipts (resulting from the JV's £10 million revenue allowance) and from on-sales and hedging of the JV's output.
Where the generation assets are within a group then the liability falls on a single group company, or the "lead member", with other group members then being jointly and severally liable. Where a group member has a significant minority shareholder (with over 10% ownership), the group may elect for the amount of the group’s liability that is attributable to that group member to be an individual liability of that member.
However, many renewable generation assets are held not in "traditional" group equity vehicles but within fund structures where a single fund or investment manager may manage and control multiple funds, with each fund owning a number of holding companies each of which in turn is part of a group owning multiple renewable-generation assets.
Ascertaining the exact arrangements for the management and control of these funds and investment decisions will be necessary to identify the extent of a group, particularly in the context of joint and several liability and potential for some entities in a group to be overseas.
Transfer pricing and anti-avoidance
The levy contains a very wide targeted anti-avoidance rule (TAAR) covering arrangements that seek to reduce as well as avoid the charge. Unlike some other TAARs, there is no carve out for bona fide commercial arrangements. The TAAR will require careful consideration not only when new arrangements are being entered into but also where changes are being made to existing arrangements.
There are also concerns for groups with generation receipts that are based on intra-group transactions. The draft legislation provides for adjustments to be made by HMRC to align the undertaking’s receipts to those that would have been receivable at arm’s length (under transfer pricing principles). The pricing of intra-group transactions made or amended on or after 1 January 2023 will need to be carefully considered and documented.
Osborne Clarke comment
The levy is an unprecedented intervention in the electricity market in unprecedented times, which will have ramifications beyond the headline grabbing rhetoric for PPP authorities, fund managers and investors as well as renewable generators.
Should you have any questions about the points highlighted or how the levy may apply to you, please contact Simon Hobday or another member of the Osborne Clarke Energy team.