UK Government advances with Electricity Producer Charge
The UK government has introduced a new levy, the Energy Generator Levy (EGL), aimed at funding Contracts for Difference (CfD) payments to low-carbon generators. This levy will be applied to electricity suppliers, but payments will not be required until the Spring Finance Bill, which enacts the EGL, receives Royal Assent.
The EGL functions as a supplier obligation, enforced like a licence condition. Electricity suppliers must fund CfD payments regardless of direct collections from customers, ensuring stable income for generators under CfD contracts. The levy is charged per unit of electricity supplied at a fixed rate (£75 per MWh) and is directly linked to market volumes.
The EGL supports renewable and low-carbon power generators contracted under the CfD scheme by covering the difference between a fixed strike price and the market power price. This mechanism protects investors from price volatility and enables long-term project finance.
The levy is self-assessed in business income tax returns, and amounts will become due and payable in alignment with Company Tax. Notably, earnings from the sale of electricity that is produced under a CfD are excluded from the levy.
The EGL applies to nuclear, green (including biomass), and energy from waste generators, but not revenues from storage. The levy will also affect corporation groups or standalone companies that produce more than 50 GWh annually of power in the UK and are connected to the UK national transmission network or local distribution networks.
The levy may influence the reputation of the UK as a market where regulatory change risk is less likely compared to other jurisdictions. It's also worth noting that the levy will not be tax-deductible from business tax income.
Regarding its impact on the clean power market and hydrogen production, the EGL under CfDs has supported the financing and delivery of low-carbon power projects, including renewables and nuclear. This de-risking of revenue streams for investors enables stable returns even if market prices fall below strike prices. While hydrogen production is not directly covered in the EGL, the levy’s support of clean power generation underpins the availability of low-carbon electricity, which is critical for green hydrogen production using electrolysis.
The UK government's broader market reform priorities emphasize delivering net zero investment and a flexible, smarter energy market. This suggests that EGL and CfDs play a central role in facilitating the shift to clean power—including power to hydrogen pathways—though explicit references to hydrogen in relation to the EGL were not found in the retrieved documents.
The EGL is likely to have an impact on project economics for existing appropriate generating capacity in the UK, with a focus on the low level of the benchmark price and the non-deductibility of the EGL being a more extreme treatment than in Europe. Special rules will apply to JVs and companies with significant minority investors.
The UK Government introduced a 45% temporary levy on "phenomenal" invoices generated from the production of wholesale power on January 1, 2023, and it will remain effective till March 31, 2028. The levy will only apply to outstanding invoices exceeding £10 million in an audit period. Payments of the EGL will depend on the taxpayer's audit reference date.
The EGL is likely to have a knock-on impact on the UK's emerging clean hydrogen market, which depends on low-cost renewables. The levy creates an incentive for long-term sustainable power supply arrangements for hydrogen projects to be priced at or below the benchmark cost.
The UK Government has published a "technical note" on the operation of the levy, and the first quarterly installment payment that includes an EGL repayment is expected to be on 14 July 2023 for large companies with a December year end. The draft legislation includes provisions to combat avoidance strategies aimed at reducing or avoiding the levy or the effects of the regulations. "Cutting-edge storage technologies such as hydrogen" have been excluded from the scope of the levy.
In summary, the Energy Generator Levy is a key component of the UK’s low-carbon energy financing framework that funds CfD payments through a fixed-rate supplier levy per MWh, supporting clean power projects’ financial viability and indirectly enabling hydrogen production by stable decarbonized electricity supply.
Electricity suppliers must fund Contracts for Difference (CfD) payments through the Energy Generator Levy (EGL), regardless of direct collections from customers, ensuring financial support for generators under CfD contracts. This levy, charged per unit of electricity supplied at a fixed rate, is directly linked to market volumes and contributes to the financing of renewable and low-carbon power generators, including those involved in hydrogen production using electrolysis.
