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.

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.