EGL62200 - Significant minority shareholders in group companies: treatment of generation supplied to a significant minority shareholder

F(2)A23/S296 addresses the situation where a generating undertaking that is a member of a group supplies electricity to a significant minority shareholder which then sells it on. The aim is for the EGL to take account of the minority shareholder’s position. The meaning of significant minority shareholder and relevant subsidiary can be found at EGL52000.

In the following guidance the term “shareholder” is used as shorthand for “significant minority shareholder” but that term may apply to either a single company or a group generating undertaking. The rules apply equally to an investor in a group company that does not have share capital.

The treatment is very similar to that where a participant in a joint venture receives generation from the joint venture.

Broadly, where a minority shareholder realises amounts, including from hedging arrangements, from selling output of the group company or a relevant subsidiary, those amounts will be treated as additions or reductions to the exceptional generation receipts of the shareholder. For example –

  • A shareholder buys electricity from the group company and then sells it to third parties in the wholesale market at a higher price. The net receipts that the participant makes from that on-selling would be included when calculating its exceptional generation receipts.
  • A shareholder buys electricity from the group company and then sells it to third parties in the wholesale market at a lower price. The net shortfall that the participant makes from that on-selling would be included when calculating its exceptional generation receipts.
  • A shareholder buys electricity from the group company and sells electricity to third parties on a similar basis. It also enters into a financial hedge in respect of its share of the generation of the group company. The return that the participant makes from that hedge would also be included in calculating its exceptional generation receipts.
  • Alternatively, a shareholder may make a loss on the hedge described above. Then the loss would also be included in calculating its exceptional generation receipts.

This treatment applies to generation received from the group company, or a relevant subsidiary, to the extent that this reflects the shareholder’s interest in the group company as it is accepted that any excess generation received will representing the shareholder activity as an electricity trader rather than an on-seller of the group company’s output. For example: say a shareholder has a 15% minority shareholding in the group company but receives 100% of the output from the generating station that is operated by group company – effectively it is operating as the off-taker for the whole of the group company’s generation. The minority investor may enter into forward sale agreements and financial hedges to manage its risk to electricity prices. The rules will bring into account the net receipts of the investor that relates to its share of the generation of group company and any relevant subsidiary, but not the net receipts that it realises as part of its off-taker role. Any necessary apportionment required to calculate the net receipts attributable to the investor under this rule is to be made on a fair and reasonable basis.

The “relevant proportion” of the generation of the group company and of any relevant subsidiary that is subject to this rule means the proportion of the group company’s ordinary share capital held by the shareholder. Where and more than one company in the same group holds shares in the group company, the entitlements of the various group companies are aggregated. If the group company does not have ordinary share capital, then the assessment is instead based on entitlement to the company’s profits, F(2)A23/S292(3)-(4).

The main effects of the rule are that –

  • The qualifying proportion of the electricity generation of the group company or any relevant subsidiary that is supplied to the minority shareholder is to be attributed to both the group company and the shareholder.
  • The sale by the minority shareholder is ignored when calculating the exceptional generation receipts of the group of which the group company is a member. This means that it is the receipt from the sale to the shareholder that is relevant.
  • The shareholder may also deduct the costs of that generation allowable under F(2)A23/S284.
  • The shareholder will deduct the cost of purchasing this generation, rather than applying the benchmark amount, when calculating its exceptional generation receipts.

Where the shareholder is not itself a generating undertaking then it is treated as one for EGL purposes. For example, an energy trading group has a significant minority shareholding in a group company that generates and takes part of the output. The trading company (or group) is liable to EGL on its receipts from trading this output in the wholesale market because it is treated as a generating undertaking even though it does not itself generate electricity.

The examples for the corresponding rule for joint ventures at EGL61000+ illustrate the overall effect of the rule.

Offset of shortfalls

It may be the case that an investor may not have sufficient generation receipts attributed to it to fully relieve any shortfall. See EGL63000+ for details of rules that allow in certain circumstances a shortfall to be surrendered between the group company and its minority investors.

Alternatively, the group company and its investors may elect to treat the company as transparent under the rules – see EGL64000+ for details of this election.