UK Government announces measures to incentivise new renewable energy projects

The Chancellor’s Autumn Statement on 22nd November 2023 provided welcome and long overdue measures to incentivise renewable energy projects in the UK. Policy impacting renewables in the UK has been turbulent over the past decade and there has been much uncertainty in the market stalling investment. We are hopeful that this is the start of a positive wave of long-term measures that will incentivise investment into renewables. The new measures include:

  1. Exemptions from the Electricity Generation Levy
  2. Permanent full expensing of capital costs
  3. Quicker grid connections and planning decisions

New renewables now exempt from the electricity generation levy

From 22nd November 2023 new renewable generation or new additional capacity will not be subject to the Electricity Generator Levy (EGL) if the decision to invest was taken after this date. This is good news for the onshore wind, utility scale solar and offshore wind sectors. This change in EGL will reduce the long-term business case uncertainty (the EGL runs till 2028 for existing projects) and will help to boost the business case for new projects (under the current EGL rules a 45% tax applies to generators with revenues above £75/MWh).

We envisage this key change making the UK a more attractive place for international investors too. When introduced initially the EGL negatively impacted the market and stalled investment in the UK. At the time of its introduction the US and EU had much more attractive policies and we saw international investors cooling off the UK significantly to focus on these markets instead. This reversal will hopefully unlock stalled projects and encourage international investors back to the UK.

Whilst this is great news for new renewables, it does not have an impact on those already commissioned which are subject to the levy until March 2028. Hopefully it does provide optimism that after this date it is more likely that the Government will stick to their intention of ending the EGL for existing renewable generation too.

Permanent full expensing of capital costs for renewable and low carbon projects

The permanent change to capital allowances in the Autumn Statement provides a significant tax cut for those investing in renewable energy projects. Prior to the announcement, there was much uncertainty on this, and any improvements had been short-term, which only suited small projects. Now permanent, this provides long-term certainty so that businesses can plan larger longer-term investments and budget for the write-off. This change is good for both businesses investing in low carbon onsite solutions to reduce energy demand as well as utility scale developer customers investing in renewable systems.

Full expensing was introduced initially in April 2023 but only for a three-year period. This meant that it was not long enough for anyone investing in large projects to include in their business models because there was no guarantee that it would be around when they come to build their assets. Now permanent it can be included and may well boost the return on investment. From an initial review, 50% of special rate asset and 100% of main pool asset investment can be written off against taxable profits in the first year. There’s no limit on the investment amount either, so good news for large companies investing in longer term larger projects.

For example, a developer investing in a £50 million solar farm could write down £25 million in capital allowances in the first year. The benefit of this allowance is carried forward, reducing corporation tax payments to nil for many years and substantially improving the return on investment.

This is not only a benefit for developers, it also provides a benefit for any business that invests in low carbon energy systems. For example, a business investing £1 million in rooftop solar could write off 50% of this investment (£500,000) from their taxable profits in the year the project is installed. Hence providing an incentive for businesses to invest in low carbon technologies to reduce energy bills and meet their Net Zero targets. The only downside is the business needs to be making profit to get the benefit, but the write off can also be carried forward to future years.

Streamlined grid connections and speeding up planning decisions

The Autumn Statement also included promises to streamline grid connections and speed up planning decision timelines, which are key barriers to renewable developments in the UK. Both are welcome changes, but quick implementation is key to realising their impact.

Delays in connecting new renewable generation and energy storage assets remains one of the biggest barriers in the UK market. The Autumn Statement has accepted all of the reccomendations for improving the UKs electricity networks outlined in the Winser Review. Moreover, the Government has comitted to reduce waiting times for a grid connection from 5 years to no more than 6 months and free up 100GW of capacity so that projects can connect sooner.

Alongside slow grid connections, planning policy, especially in England, is another key barrier for renewables. In addition to the ambitions for grid connections, the Government acknowledges that the planning process is inefficient and outlines its intention to reform the system. The key to this is speeding up approvals for low-carbon energy projects. The statement outlined guaranteed accelerated decision dates for major applications and fee refunds if these are not met.

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