EGL61300 - Joint ventures: treatment of joint venture generation supplied to participants: extended example
This example is based on that set out in the Technical Note published by HM Treasury alongside draft legislation in December 2022 and uses the EGL benchmark amount and levy rate that applied for qualifying periods ending before 1 April 2024.
Company A and Company B each own 50% in a JV. The JV sells 1 million MWh output to Company A at a fixed price of £125/MWh and 1 million MWh to Company B at day-ahead prices. It also sells 1 million MWh output to Company C, a third-party at day-ahead prices.
The average output price achieved by the JV over the period is £145/MWh.
Company A sells on the power it buys from the JV at an average price of £150/MWh. Company B enters into day-ahead-fixed swap that acts as a hedge against its JV interest and makes a loss on that instrument of £20 million (£20 per MWh).
The JV has exceptional UK generation receipts of (£145/MWh – benchmark £75/MWh) x 3 million = £210 million.
The JV’s liability to the levy is therefore calculated as:
- £210 million – £10 million allowance = £200 million chargeable exceptional generation receipts
- £200 million x 45% = £90 million EGL liability
As participants in the JV, Companies A and B of the JV members will also be liable for the EGL on specified amounts relating to their interest in the JV as follows:
Company A –
- A proportionate share of the JV’s exceptional generation receipts below the JV’s allowance: 50% of £10 million = £5 million, plus
- Its own exceptional receipts from output received from the JV of (£150/MWh – £125/MWh paid) x 1 million = £25 million)
- Total exceptional receipts for EGL purposes £30 million (before the revenue allowance)
- Assuming that it has no other generation receipts, it will have £30 million - £10 million = £20 million of chargeable exceptional receipts for the period.
- It will therefore have an EGL liability of £9 million (at 45%).
Company B –
- A proportionate share of the JV’s exceptional generation receipts below the JV’s allowance = £5 million (as for Company A), less
- a loss of £20 million on the derivative instrument. An alternative way of looking at this is that Company B is selling generation it bought for £145/MWh at a net price after the hedge of £125/MWh: (£125/MWh – £145/MWh paid) x 1 million = £20 million)
- This results in a net shortfall of £15 million in relation to its participation in the JV.