EGL24100 - Allowable costs: overview of allowable costs

In general terms, the EGL is a temporary levy on the exceptional receipts a generator receives for its power. Operational overheads and other costs such as business expenses such as financing costs are not normally deductible when calculating the amount of its exceptional receipts. Whilst such general costs can be expected to increase over time, this is compensated for by the indexation of the benchmark price against which exceptional receipts are measured. The exceptions to the general rule preventing deductions for operating costs are –

  • the effects from exceptional increases in generation fuel costs, see EGL24300,
  • the cost of purchasing electricity on the wholesale market that a generation undertaking has contracted to supply but does not actually generate, and
  • certain arrangements under which a generating undertaking gains access to a fuel source in return for sharing revenues from the generation of power, see EGL24400.

The attributable amount of allowable costs under these headings can be deducted at Step 4 of the calculation of a generation undertaking’s exceptional receipts.

In order to deduct allowable costs, the following conditions must be satisfied:

  1. The costs are fairly and reasonably attributable to generation receipts taken into account by the undertaking for the EGL in the period.
  2. The costs are incurred by the undertaking.
  3. The costs have not otherwise been accounted for in calculating the amount of its generation receipts.
  4. A claim has been included for those costs in a company tax return for the period.

The first condition may, for example, require an apportionment of costs where fuel is acquired for use in power stations that are not all relevant generating stations, or for purposes other than generation. If fuel is acquired for generation by a relevant power station, but not all that fuel has been used in the period then only the amount that is actually used for generation in the period is to be included when calculating the attributable amount for the period.

For the second condition, a cost in respect of fuel will be incurred if the undertaking has paid for fuel directly, or the amount has been deducted from a receipt otherwise due to the generator. The cost of fuel should be based on what was actually paid for the fuel, not what the market price is at the point of usage. The undertaking should ensure that they account for fuel costs using an appropriate convention that would be expected to match what is used for corporation tax and accounting purposes.

The third condition ensures that there is no double-counting of the cost.

When considering fuel or other costs acquired under non-arm’s length arrangements, it is the arm’s length amount of those costs which is to be taken into account where that would be lower than the amount otherwise incurred by the undertaking (F(2)A23/S284(4)).