The UK's tax on renewable energy generators, which seemed badly thought out from the start, is failing in a number of ways, analysts say, and there will be hopes that there can be a U-turn at the upcoming autumn statement.
Chancellor Jeremy Hunt unveiled the electricity generator levy (EGL) this time last year, implementing the 45% tax from the start of 2023.
But both the renewable energy sector and City analysts have criticised the structure of the levy, saying it is blocking the development of renewable energy and could see the government miss its net zero goals, with investor confidence damaged and scope for further new investment reduced.
"We think the UK'S EGL is a good example of state meddling in the investment landscape, with the end result being that investor confidence has been damaged and scope for further new investment has been reduced," said analysts at broker Stifel.
"Whilst we realise the Treasury was in a difficult position given the need to reduce the size of the increase in consumers' energy bills last winter, we suspect that one of the unintended consequences of taxing renewable energy, probably not realised by officials, was that it has made investment in renewable energy projects less attractive."
Taking from Peter to pay Paul
Like the windfall tax on oil companies, the idea was that taxing electricity generators, even green ones, would not damage the sector due to the high earnings being enjoyed by the sector as energy prices rocketed in the wake of the Ukraine invasion.
Hunt and the Treasury saw the EGL as helping pay for the household energy price guarantee, and running until 2028.
It is applied to power prices achieved above £75 megawatts per hour (MW/h), and from Arpil next year it will be index-linked to UK CPI inflation.
Is it doing the job?
At the time the tax was announced, the Treasury forecast revenues of £4.1bn in the year to April 2024 and a total raise of £14.2bn between 2023 and 2028 from the EGL.
This has turned out to be optimistic so far, said Stiffel, following the substantial decline in the power price over the past year to around £90/MWh.
At the time of the announcement, the Treasury justified the price level of £75MW/h as being "considerably higher than the average wholesale electricity price in the decade up to 2021.
However the Stifel analysts countered that the price was relatively low price compared to the £300MW/h price achieved in the market at times during 2022.
"Whilst the state is happy to tax the sector when times are good, we doubt if the sector would receive state support if the price reverted to the £20MW/h levels seen in 2020, with this resulting in low dividend cover levels for the funds.
"We also think the six-year duration of the Levy through 2028 feels like a long-term burden for investors, rather than a short-term measure imposed as a windfall tax in reaction to the higher power price related to the Ukraine war."
They noted that the 45% tax rate also appeared high compared to other corporate tax rates.
"It appears they had a hole of -£24.8bn to fill in respect of energy price relief for consumers in the year to 05/04/23 and -£12.8bn in the year to 05/04/24. We suspect the tax level was drawn up purely with the focus being to minimise this gap.
"We doubt if there was attention paid to the risk of lower investor interest in the sector and new investment in renewables as a consequence of this new tax."
How could the Chancellor tweak it?
The analysts said they have some sympathy with the Treasury's predicament of having to fund a consumer price relief package, but suggested a scheme that funded the relief through a levy on bills over the subsequent 10 years may have been a better mechanism.
Members of the renewable energy industry have called for an investment allowance such as the government has linked to the oil and gas windall tax, where firms can offset from their tax bill £91.40 in every £100 spent on new production.