Renewables:Whilst the wider transactions market has slowed down in recent months, transaction activity in the renewables sector has remained very active, particularly with respect to greenfield renewable financing.
The introduction of the Electricity Generator Levy (“ EGL”) (a temporary 45% tax charge on a measure of “Exceptional Generation Receipts” to apply until 31 March 2028) has added a layer of complexity for investment appraisal, as well as existing investments, where it has been important to understand the economic impact of the EGL rules on key metrics (e.g. rate of return), whilst also ensuring compliance requirements and payment deadlines are met.
However, the valuation impact of the introduction of the EGL has been limited in some cases, depending on the nature of the assets or source of revenues. This is due to the various exclusions in the rules for Renewables Obligation Certificates, Contracts for Difference or Feed-in Tariffs, as well as current electricity pricing levels
. We have seen further intricacies with joint venture investments, as the rules are particularly nuanced. It has been important that investors consider the impact on their own topside structures as well as relevant joint venture acquisition structure.
The UK government’s recent Autumn statement included an announcement that the EGL will not apply to generation from new or expanded electricity generating stations where the investment decision is made on or after 22 November 2023.
It is helpful that the government has listened to business and is seeking to remove potential EGL-related barriers to new electricity generation.
However, the beneficial impact may be limited, given the long lead time between making a final investment decision and reaching first power, and the EGL end date of 31 March 2028.
Oil and gas insights
The Oil and Gas transaction space remains active, however, naturally the Energy (Oil and Gas) Profits Levy (“EPL”) (a temporary 35% levy on the ring fence profits of oil and gas companies to apply until 31 March 2028) has had an impact, and in certain instances, has been a material factor in transactions being aborted.
This is not only due to the immediate cash flow requirements of the EPL, but also the deferred tax impacts of the EPL being in existence to 2028 and causing a significant strain on valuations. From a trading perspective, many operators are looking to delay decommissioning spend, given its non-deductibility for the EPL, whilst also accelerating capital expenditure to avail of the EPL investment allowance.
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