EGL61200 - Joint ventures: treatment of joint venture generation supplied to participants

Joint ventures that undertake electricity generation are liable to EGL in their own right on the same basis as other companies or groups. However, it can often be the case that investors in joint ventures enter into arrangements in relation to their share of the generation of the joint venture.

F(2)A23/S294 addresses the situation where a generating undertaking that is a qualifying joint venture (JV) supplies electricity to a participant which then sells it. The aim is for the EGL to apply to take account of the participant’s position.

A participant is defined by F(2)A23/S292 as a member having a 10% or greater interest in the JV, see EGL51000.

Broadly, where a participant in a JV realises amounts from selling output of the JV, including from hedging arrangements, those amounts will be treated as additions or reductions to the participant’s exceptional generation receipts. For example –

  • A participant buys electricity from the JV 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.
  • Equally, a participant may sell the electricity in the wholesale market at a lower price. The net shortfall that the participant suffers from that on-selling would be included when calculating its exceptional generation receipts.
  • A participant 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, the participant 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 by a participant from a JV to the extent that this reflects the participant’s interest in the JV as it is accepted that any excess generation received will representing the participant’s activity as an electricity trader rather than am on-seller of the JV’s output. For example: say a participant has a 15% interest in the profits of the JV but it receives 100% of the output from the generating station that is operated by the JV – effectively it is operating as the off-taker for the whole of the JV’s generation. The participant 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 participant that relates to its share of the generation of JV, 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 participant under this rule is to be made on a fair and reasonable basis.

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

The main effects of the rule are that –

  • The relevant proportion of the JV’s electricity generation that is supplied to the participant are to be attributed to both the JV and the participant.
  • The sale by the participant is ignored when calculating the JV’s exceptional generation receipts. This means that it is the receipt from the sale to the participant that is relevant for the JV.
  • The participant may also deduct the costs of that generation allowable under F(2)A23/S294(3)(e).
  • The participant will deduct the cost of purchasing the generation from the JV venture, rather than applying the benchmark amount, when calculating its exceptional generation receipts.

Example

A JV sells electricity to a participant at £100/MWh giving an exceptional receipt of £25/MWh by reference to the benchmark amount. The participant then sells the electricity for £120/MWh. The participant’s exceptional receipt is £20/MWh rather than the excess over the benchmark amount of £45/MWh. The total exceptional generation receipts are therefore £45/MWh.

There is an extended example at EGL61300.

Offset of shortfalls

It may be the case that a participant 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 JV and its participants.

Alternatively, the participants and the JV may elect to treat the JV as transparent under the rules – see EGL64000+ for details of this election.

Example (continued)

Conversely, if the intermediate sale was priced at £60/MWh then the JV would have no exceptional receipts by reference to the benchmark amount. Instead, it would have a shortfall of £15/MWh compared with the benchmark amount. The participant’s exceptional receipts would be the difference between its sale price of £120/MWh and its purchase price of £60/MWh, being £60MWh. If the parties agree, the JV could surrender the shortfall of £15/MWh to the participant. This would reduce the participant’s exceptional receipts to £45/MWh.