What the Spring Budget 2023 means for the energy sector

At a macro level, the Chancellor outlined measures including support for carbon capture usage and storage, as well as continued support and expansion of nuclear energy projects. These policy announcements are welcome in terms of supporting these sectors, particularly on the carbon capture side where the commercial viability of projects remains a serious business concern. However, the policies do little to alleviate immediate energy security concerns, with no specific new funding for large scale nuclear. Realistically these measures will not generate tangible outputs until well into the next parliament or beyond.

Ben Morris, Energy, Infrastructure and Environment Partner at Mazars commented that “for both green energy and renewables, as well as on-going nuclear investment, unlocking issues with siting and planning around projects and grid constraints are critical to the continued growth of new renewables.” The reclassification of nuclear as an “environmentally sustainable” source of energy, combined with the retention of the Electricity Generation Levy impacting directly on the renewable sector cashflows continue to undermine the Government’s credibility in relation to the support for the green energy and renewable sector.

In terms of specific changes to that legislation, here a few points businesses in the energy sector should consider.

Tax deductions for capital expenditure

The introduction of full expensing for capital expenditure from 1 April 2023 (after which date the corporation tax rate increases to 25%) was at the core of the Government’s business taxation announcements. The measures would allow 100% corporation tax deductions for qualifying plant and machinery expenditure (50% for special rate, including long life, plant and machinery) in the year expenditure is incurred. These measures are proposed to have a three-year life span, running until April 2026. Many companies had already accelerated capital expenditure to benefit from the existing super-deduction, which offered allowances of 130% for main pool expenditure when the corporation tax rate was 19%.

The continuation of a 100% first year allowance regime will certainly assist those with large capital expenditure plans, although the time scales for certain infrastructure projects means that not all construction expenditure may complete in the timeframes required to obtain these enhanced allowances i.e. before April 2026. Moreover, specific sectors such as solar and technologies with a longer life span such as ‘energy from waste’ (EFW etc) may only be able to benefit from the reduced rates available for special rate expenditure rather than the general plant and machinery FYA of 100%.

Battery storage and EV charging schemes, as well as Biomass may be able to continue to generate significant tax deductions for in year expenditure.  This may help to mitigate the increased corporation tax headline rate to 25% from 19% with effect from April 2023 for businesses currently in profit. Initial modelling on a stand alone company basis suggests that any benefits when combined with the restriction on use of future losses under existing legislation, may mean any cash flow benefits have only a nominal impact on returns over the lifetime of the project.

More details on the Electricity Generation Levy (EGL)

The Spring Finance Bill will also contain legislation relating to the Electricity Generation Levy (EGL).  The Levy was previously included in the Autumn Statement with draft legislation issued shortly before Christmas. The Chancellor didn’t comment on this further in the Budget, but the measures will still introduce a 45% levy applied to the excess revenues from electricity generation above a price per MwH of £75 (a benchmark to be adjusted by CPI from 1 April 2024). The EGL has a relatively low generation threshold, applying to groups where the total generation exceeds 50GwH per annum, with the EGL applied to those excess revenues above a group allowance of £10m.

The measures will have effect from 1 January 2023, running until March 2038 and be subject to the corporation tax administration rules, including for filings and payments. Limited details on these aspects were included in the draft legislation, with a number of anomalies being highlighted to Treasury during the on-going consultation at the beginning of 2023.

The rules as initially drafted still left question marks over the definitions of groups and joint-venture arrangements. While the grouping definitions were broadly based on corporate tax loss groupings, the detail in the rules left some fund structures uncertain whether they may be captured on a consolidated basis. Outside of these remaining intricacies, the consensus is that the initial periods of the EGL will see the largest liabilities arising, with prices anticipated to drop from 2024 onwards.

Once the Spring Finance Bill is published, there will be a scramble for companies to understand the potential revised implications of these measures, albeit the essence of the rules remains unchanged. A frustration in the industry is that unlike the Energy Profits Levy, which specifically applies to the UK Oil and Gas sector, there are no offsets or reliefs available where excess profits have been re-invested into new infrastructure expenditure.

Outside of these core items, there were limited specific measures which were directly related to the energy sector per se. Whilst we welcome measures that seek to accelerate the growth of the renewables industry in the UK, we believe that this Budget on its own is unlikely to lead to significant changes to the number of new green energy projects being deployed or to the investment plans of businesses.

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