The UK government has outlined further details of the 45% windfall tax it will impose on earnings made by renewable generators from the new year.
Documents accompanying draft legislation for the Electricity Generator Levy state the benchmark price from which it will apply will be indexed against the Consumer Price Index (CPI), while the previously-tabled annual generation threshold has been halved to 50GWh.
The Treasury confirmed the 45% tax will apply to “exceptional receipts that groups realise from electricity generation in the UK”, replacing the Cost-Plus Revenue Limit announced in October and effective from 1 January 2023 through to April 2028.
It said that to ensure the tax “continues to represent a measure of exceptional revenues that exceed expectations”, the initial £75 benchmark price will be adjusted each year from April 2024 in line with changes to the CPI in the preceding calendar year.
The annual 100GWh qualifying generation threshold has meanwhile been halved to “reduce the risk” of generators exceeding the £10m allowance for covering exceptional costs, which the government said “could create disincentives to generate around the threshold”.
Revenues accrued from electricity generated at an agreed strike price under a Contract for Difference will not be subject to the windfall tax, however power sold to the merchant market by CfD assets will be taxed.
This would include circumstances where only part of the asset is covered by a CfD, or where a project has been commissioned but not yet moved onto its CfD arrangement.
The Treasury said it does not intend to revisit the policy decisions now set out in the draft legislation “but will continue to consider the rules for a small number of identified areas such as the treatment of qualifying joint ventures”.
Commenting on the draft legislation, the Association for Renewable Energy and Clean Technology (REA) questioned the “wisdom” of subjecting the renewable energy sector to a more “punishing tax system” than its oil & gas counterparts.
REA director of policy Frank Gordon said: “We strongly urge the Government to fix this disparity by providing a tax relief for low carbon investments as part of the Electricity Generator Levy design. As is already in place for the oil and gas sector in the Energy Profit Levy. This is crucial for getting investments in renewables moving again following the pause that resulted from the last few months of political and policy uncertainty.
“In the short term, renewable generators can help address this energy crisis by helping keep the lights on this winter, and the REA welcomes the moves on exceptional costs and Indexation, which will mitigate some negative impacts of the levy. In the long-term, renewable generators will provide the UK with homegrown, low-carbon energy, not only providing us with energy sovereignty, but also providing us with much needed economic growth. The market value of the renewables industry is set to more than double to £46bn by 2035.
“The REA is now urging the Prime Minister and Chancellor of the Exchequer for further clarity on the levy, and to ensure that any mechanism used to raise funds from the renewable energy sector is fair, equitable and supports our sector to grow.”