22 Dec 2022
Robyn Lucas

The Electricity Generator Levy: How might it impact battery energy storage?

In his Autumn Statement, the Chancellor announced the introduction of the Electricity Generator Levy - a significant new tax on renewable energy generators.

We previously shared an overview of the Energy Generator Levy, and its implications for the storage sector. But how would the Levy impact a co-located solar and storage site?

Give me the headlines

  • The Energy Generator Levy will apply to all generators that produce more than 50 GWh annually. These generators - renewable and nuclear - will have 45% of their wholesale revenues taxed above £75/MWh, once their revenues exceed £10 million.
  • These rules will apply over the next five years.
  • Battery energy storage and pumped hydro are exempt.
  • The Levy could have big implications for the co-location of solar and storage in the UK, depending on its application.

The HMRC technical note and December update to the technical note are linked.

As battery energy storage is exempt, it shouldn’t directly affect the business case for standalone batteries. But how might the Levy apply to co-located assets? Let’s look at one possible scenario.

Co-locating solar and storage, you say?

Let’s consider how a co-located battery might operate alongside a solar farm.

In this example, let’s consider a co-located battery and solar site with the following characteristics:

  • The solar site has a capacity of 100 MWp (i.e. it produces 100 MW at its peak), and is co-located with a 50 MW/100 MWh battery.
  • The solar site has a fixed price Power Purchase Agreement (PPA) - and receives £175/MWh for all energy produced.
  • Exports from the battery are separated (via additional on-site metering) and receive the N2EX hourly day-ahead price.
  • To take advantage of this arrangement, the battery is co-optimized. It charges only from the solar and discharges to the grid, through the same export connection that the solar uses, during the two hours of the highest prices (according to the N2EX day ahead hourly price).
  • This example could be relevant for those solar sites considering co-locating storage, but which don’t have any import capacity on their grid connection.

Figure 1 shows an example of this optimization across one day.

Figure 1: Example of a 100MWp solar site co-located with a 50MW, 100MWh battery, co-optimized on one day in November.

In this example, we’ve chosen 11th November 2021. The revenues for the overall site on this day are shown in figure 2 (below).

Figure 2: Example of co-optimization of battery and solar on 11 November 2021.
  • The battery ‘pays’ to charge from the solar, at the solar PPA rate of £175/MWh.
  • Discharge from the battery is settled at the N2EX price, which peaks at £373/MWh.
  • By time-shifting the solar power via the battery, the overall site would make an additional £11.7k (or 18%) vs. what the solar would have made on its own.

What could the Electricity Generator Levy do to these revenues?

Let’s model what this site could have done over the past year.

Every day, if there is enough solar power to fully charge the battery (which happens on 288 days in an average year), the battery is charged up from the solar and then discharges during the two hours of peak N2EX pricing. A battery could participate in other services around these charging and discharging actions - but we’ve ignored these for the sake of simplicity.

Let’s calculate the tax for three scenarios over a year:

  1. The 100 MWp solar site, on its own.
  2. The 100 MWp solar site with a co-located 50 MW/100 MWh battery. Revenues from exports of both the solar and the battery are included in calculating the Levy - so the co-located battery is not exempt from the Electricity Generator Levy.
  3. The 100 MWp solar site with a 50 MW/100 MWh co-located battery. Revenues from exports of just the solar (at the time it is produced) are included in calculating the Levy - so the co-located battery is exempt from the Electricity Generator Levy.

We also assume the same corporate group owns the solar and the battery - and that it owns nothing else which is subject to the Electricity Generator Levy.

1. Tax for 100 MWp solar farm

With a flat power price of £175/MWh and an average load factor of 14.7%, the site would pay £1.2 million in tax due to the Levy. This would reduce overall revenues by 6%.

Figure 3: Tax calculation for a site with only a 100 MWp solar farm.

2. Co-located storage where revenues from time-shifted solar are included in the Levy calculation

If the battery charges from cheaper solar and exports at peak times (at the N2EX Day-Ahead hourly price), the site would gain an extra pre-tax annual revenue of £3.6 million. This is equivalent to £72k/MW for a 2-hour battery system. (Caveat: this is highly dependent on the power prices used in the modeling!)

If the Levy includes the generation from the solar as part of the ‘exceptional generation’ receipts or taxable exports, the higher £/MWh achieved from time-shifting the solar (by discharging the battery at the N2EX price rather than the solar price) is taxed. This takes the overall tax to 11%, shown in figure 4 (below).

Figure 4: Tax calculation if time-shifted solar-generated energy is included in the Levy calculation.

3. Co-located storage where revenues from time-shifted solar are NOT included in the Electricity Generator Levy calculation

Figure 5, below, shows the case if the time-shifted solar is not included in the Levy calculation. The taxable exports are just those that come directly from the solar, which flows to the grid at the time it is produced. Given the £75/MWh benchmark power price and the £10 million allowance included in the Levy calculation, the tax calculation comes out at £0.

Figure 5: Tax calculation if the time-shifted solar is not included in the Levy calculation.

Over a year, the site makes £26.2 million- 12% more than in scenario 2.

What does this all mean for co-located storage?

Currently, most co-located assets are operated entirely independently and may be owned separately. Depending on how the Levy is applied, it could create a financial incentive to align the ownership and operation of co-located assets.

Co-locating (and co-optimizing) storage on existing solar sites will be a massive opportunity in the next few years - easing local network constraints, sharing valuable grid connections, and providing energy to the grid at times when demand is highest. The government should encourage investment in these projects to meet its energy storage (and net-zero) goals.

What’s next?

In the government’s December update to the technical note, there is some additional guidance for co-located assets:

In cases where generating stations also export power that they have not generated to the grid – for instance, a hybrid site using renewable generation and battery storage – there will be a need to:

  • Determine the amount of metered output that relates to generation as compared to output that relates to power imported, stored and exported.
  • Separately determine the amount of receipts of the group that are attributable to that generated output.

More detail will be provided in ‘forthcoming guidance’ - keep an eye on the Modo platform as we follow this evolving picture!

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