UK Government Advances with Electricity Producer Surcharge
The UK government's focus on energy market arrangements has shifted significantly, with the introduction of the Energy Market Levy (EGL) and the Energy Profits Levy (EPL) causing a wave of change in legislation risks under long-term contracts.
Starting from January 1, 2023, the UK government implemented a temporary 45% levy on "phenomenal" invoices from the production of wholesale power, known as the EPL. This levy, set to expire on March 31, 2028, applies to nuclear, green (including biomass), and energy from waste generators, excluding revenues from storage. The EGL, on the other hand, targets large generators, affecting corporate groups or standalone companies that produce over 50 GWh of power annually in the UK and are connected to the national transmission network or local distribution networks.
The EGL will be administered similarly to Corporation Tax, with the information required to be self-assessed in business income tax returns, and amounts due and payable in alignment with Corporation Tax. Settlements of the EGL will depend on the taxpayer's audit referral date, with the first quarterly instalment payment for companies with a December year end expected to be on 14 July 2023.
The EGL will not be tax deductible from profits based on Corporation Tax. However, payments and receipts under arrangements that function as a hedge of direct exposure to changes in the cost of electricity are allowed when computing generation receipts. The EGL technical note includes a minimal list of allowed costs, such as enhanced costs of generation gas, earnings sharing for access to sites, and the costs of redeeming power from the grid.
The EGL is likely to have an influence on the economics of existing appropriate generating capability in the UK, with a focus on the low level of the benchmark price and the non-deductibility of the EGL.
Meanwhile, the UK government has committed significant funding and policy support to grow the clean hydrogen sector as part of its broader Clean Energy Industries Sector Plan. The clean hydrogen industry is recognized as essential to the UK’s net-zero strategy, with government plans to remove barriers such as high upfront costs and market uncertainties, while creating incentives for hydrogen production and usage across multiple industrial sectors.
The EPL primarily taxes the excess profits of oil and gas companies but does not directly apply to emerging hydrogen projects, which often require upfront investments and are supported through other mechanisms such as the Hydrogen Production Business Model and UK Export Finance initiatives. By capturing additional government revenue through the EPL, the UK government may have more fiscal room to fund clean energy initiatives, including hydrogen development, though uncertainties remain about how these revenues are allocated.
In summary, the UK Energy Profits Levy does not directly restrict or promote the clean hydrogen market, but the additional revenues it generates can potentially support government clean energy priorities. The clean hydrogen market is mainly driven by dedicated government funding rounds and export finance initiatives aimed at overcoming investment and market confidence barriers. HMRC will provide further support on the interpretation and application of the EGL legislation in early 2023.
The UK government's focus on the energy sector extends beyond the Energy Market Levy (EGL) and Energy Profits Levy (EPL), as they also commit to growing the clean hydrogen sector. Despite the EPL not directly applying to emerging hydrogen projects, the additional revenues generated can potentially support government clean energy priorities, including hydrogen development.
The finance sector will play a crucial role in the energy industry, with the Energy Market Levy (EGL) being administered similarly to Corporation Tax, potentially impacting business operations and financial planning for large energy generators.
