UK's 45% low-carbon generator tax longer, harsher than trailed

UK low-carbon power generator returns above a benchmark of GBP75/MWh ($88/MWh) are to be taxed at a rate of 45% from January 2023 to March 31, 2028, Chancellor Jeremy Hunt said in an autumn statement Nov. 17.

The tax rate is higher and the benchmark lower than market expectations, with reports ahead of the statement referencing a 40% tax rate on earnings over a possible range of GBP75-GBP100/MWh. While characterized as temporary, the levy's six-year period is also longer than expected.

"To ensure that electricity generators also pay their fair share towards strengthening public finances...we are introducing a new, temporary 45% levy on these extraordinary profits, defined as electricity sold above GBP75/MWh," the Treasury said in an energy tax note.

S&P Global Commodity Insights forecasts UK baseload power prices peaking in February 2023 at just below GBP300/MWh, falling toward GBP200/MWh in August before rising again into Winter 2023-2024.

Combined with corporation tax, the new levy would raise the cumulative tax rate on generator earnings over GBP75/MWh to 70%, the Treasury said.

"Electricity generators still being able to write off their investments against corporation tax by deducting their investment spending from their profit," it said.

The tax was forecast to raise GBP14.22 billion in the period to end-March, 2028, annual revenue peaking next year at GBP4.08 billion, Treasury data showed.

The levy is to apply to electricity from nuclear, renewable and biomass sources. It would not apply to generators holding Contracts for Difference. These (largely wind) generators already have fixed returns under agreed strike prices.

The new levy would replace the Cost Plus Revenue Limit announced by former Business Secretary Jacob Rees-Mogg in October, the Treasury said.

The latest tax mechanism was "a more proportionate measure that is not only administrable through the corporate tax system, which generators are familiar with, but will leave generators with a greater proportion of their returns to invest in growing the UK's renewable energy capacity," the Treasury said.

Several exemptions

Gas generators would be exempt from the charge despite widening spark spreads and so profits.

Their inclusion "could have unintended impacts on pricing with implications across the entire market or on the dispatch decisions of certain business models," the Treasury said.

Neither would the levy apply to pumped storage or battery storage assets, nor to coal and oil plants.

Here the Treasury wanted to avoid distorting price signals for flexible assets, while coal and oil played minor roles but were important for system resilience.