EGL61400 - Joint ventures: participants realising amounts relating to joint venture generation

Joint ventures that undertake electricity generation are liable to EGL in their own right on the same basis as any other company or group. 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 (covered at EGL61200) sets out the treatment where a qualifying joint venture (JV) sells electricity directly or indirectly to a particular participant.

F(2)A23/S295 contains separate provision which addresses the alternative situation where JV does not supply electricity (directly or indirectly) to the participant in the JV. Again, the aim is for the EGL to apply to take account of the participant’s position.

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

  • A participant hedges the price at which the JV sells electricity to third parties and the participant makes a profit on that hedge. 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.

F(2)A23/S295 operates by treating the generation of the JV as being attributed to the participant. The total amounts to be attributed to the participant (either under F(2)A23/S294 or F(2)A23/S295) must not exceed the participants share of the generation of the JV. This is achieved by F(2)A23/S295(3) which caps the amount attributed under F(2)A23/S295 to the relevant proportion of the JV’s generation less the amount attributed by F(2)A23/S294.

The “relevant proportion” of the JV’s generation means the proportion of the JV’s ordinary share capital held by the participant company. Where more than one company in the same group is a shareholder in the JV, 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).

Example

In 2023, a JV sells electricity to a third party off-taker at day-ahead prices. In the period it generated 100 GWh of electricity. It realised an average price of £100/MWh giving exceptional generation receipts of £2,500,000 by reference to the benchmark amount of £75 (100,000 MWh x £25/MWh).

A participant with a 25% interest in the JV will have an exposure to the day-ahead electricity prices inherent in its investment – for example, being reflected in the dividend flow that it receives from the JV. The participant therefore hedges its exposure to day-ahead electricity prices by swapping this to a fixed price of £120/MWh over 25 GWh of electricity. In the period, the participant receives additional net receipts of £20/MWh (being the difference between the fixed price and the average day-ahead price).

The participant therefore includes net receipts of £500,000 (25,000MWh x £20/MWh) in its calculation of exceptional generation receipts that are subject to the EGL.

Conversely, if the participant had fixed the price at £95/MWh (say), then it would recognise a shortfall of £5/MWh in respect of the hedge. It would therefore have a shortfall of £125,000 (25,000 MWh x £5/MWh) that it can set against any other generation receipts that it has for the period.

Under- and over-hedging

Note that the participant may decide to hedge a lower amount of generation than its share of the generation that which it expects the JV to produce in the period. All of this derivative would, in this case, still be hedging the participant’s exposure to the generation of the JV.

Equally, it is possible that the participant may decide to ‘over hedge’ by entering into a derivative over a higher amount of generation than its share of the generation which it expenses the JV to produce in the period. The proportion of the hedge which exceeds its share of the expected generation of the JV would not, therefore, be hedging its share of the JV’s generation for the period. Only the proportion of the hedge that relates to the participants share of the JV’s generation will be brought into the charge of the levy.

Where the participant enters into a number of hedges, the overall effect of the hedges needs to be taken into account in determining (on a fair and reasonable basis) how much of the participant’s net receipts are attributable to its share of the JV’s generation.

Offsetting between the JV and the participant

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+ onwards for details of this election.

Further guidance

The meaning of a qualifying joint venture and a participant are set out in EGL51000.