EGL24300 - Allowable costs: exceptional generation fuel costs
Where a relevant generating station uses fuel to generate electricity, the undertaking that operates the station can reduce its exceptional generation receipts by the amount by which their generation fuel costs exceed a baseline amount, based on their historic fuel costs.
Generation fuel in this context means directly purchased fuel, such as wood and other biomass, and feedstock that requires further processing to become usable as a generation fuel, such as food, agricultural or municipal waste. In the latter case, the fuel cost many include both the cost of the waste (if any) and the costs of processing to provide fuel.
Where transport costs are incurred on acquiring the fuel, then those fuel costs may also be included, although the undertaking may choose to ignore that element if they are negligible or unlikely to change materially.
The costs may also include those of supplementary fuels, such as where it is necessary to use natural gas in an energy from waste station to ensure combustion at the required temperature. Whatever the basis on which baseline fuel costs are calculated, this must be applied on a consistent basis for all generation periods for the purpose of the EGL.
When considering exceptional generation fuel costs other than the direct costs of a fuel, only revenue costs that can be directly related to the amount of fuel or feedstock acquired should be included. This means that any capital costs, or general running costs such as labour or depreciation of plant and other assets are to be excluded. For example, if a feedstock requires processing using consumable chemicals or other materials in proportion to the amount of fuel to be derived, then the costs of those items can be included. Other operating costs of carrying out the processing are to be excluded.
In some circumstances, a generating undertaking may be paying for some forms of fuel that at other times they charge to take as a form of waste. Only the positive amounts paid are to be taken into account when calculating fuel costs, not the income that has been foregone. Any net receipts associated with the acquisition of generation fuel will not be generation receipts for the purposes of the levy, and any increase or decrease in those receipts is to be ignored when calculating exceptional generation fuel costs.
The generation fuel cost for a relevant generation station is determined on a £ per MWh of power generation basis for the purposes of determining whether costs have increased, and if so, by how much. For the purposes of calculating the baseline price this will be the lower of £65 per MWh or the average fuel cost in a specified twelve-month period between 01/01/2017 and 01/03/2020. The twelve-month period must be one in which the undertaking was operating using the same fuel source for at least 50% of the days over at least three months.
If there is no such reference period for calculating the baseline fuel costs, then a fair and reasonable estimate of those costs must be made. HMRC would accept that an estimate is fair and reasonable if, for example, it is based on prevailing market rates for purchases of the appropriate fuel source, in appropriate quantities, under supply contracts that are on equivalent terms to those that the generating undertaking currently has with a supplier.
The method of calculating the allowable amount for exceptional generation fuel costs for each generating station is:
- Step 1: Determine the actual generation fuel cost for the station for that period.
- Step 2: Convert the actual costs for the period to a figure in £ per MWh by dividing the actual cost by its attributable generation in the period. Attributable generation being calculated in the same way as for general EGL purposes, see EGL23200.
- Step 3: Calculate the baseline fuel cost of the station per MWh.
- Step 4: If the result of step 2 does not exceed the baseline fuel cost, there is no exceptional generation fuel cost.
- Step 5: If the result of step 2 is greater than the baseline fuel cost, deduct the baseline fuel cost from the result of step 2.
- Step 6: Convert the average increase in fuel costs per MWh by the attributable generation to give the amount of exceptional fuel generation costs in the period. This figure feeds into the undertaking’s total allowable costs that are deducted at Step 4 of its exceptional generation receipts.