EGL61500 - Joint ventures: additional examples for surrenders in respect of qualifying joint ventures

The EGL legislation provides a mechanism, in certain cases, for a shortfall arising in one undertaking to be surrendered to a related undertaking in respect of an overlap period. EGL63200 explains the basic framework and EGL63300 details the limitations on the amounts that can be surrendered.

The following examples illustrate how these limitations apply in respect of qualifying joint ventures (JVs). They build on the example set out in EGL63200 and extended on EGL63300.

Example 1

As with the example set out in EGL63200, but now generating undertaking X also has its own generation activity with exceptional generation receipts of £12,000,000. This gives X a net shortfall of £13,000,000.

The amount of X’s shortfall of £13,000,000 that can be surrendered to Z is then restricted to the lowest of:

  • £20,000,000 under F(2)A23/S299(2) (being the amount of the shortfall that directly relates to X’s share of the generation of Z)
  • £62,500,000 under F(2)A23/S299 (3) (being the amount of the exceptional receipts of Z that directly relates to X’s share of the generation of Z)
  • £13,000,000 under F(2)A23/S299 (7) (being the total shortfall amount of X that relates to the overlap period, taking account of any other surrenders)
  • £115,000,000 under F(2)A23/S299 (8) (while this is not a formal limit, there would be no value in Z claiming more than its total exceptional receipts)

As a result, X can surrender £13,000,000 to Z.

A surrender of this amount reduces Z’s net exceptional receipts to £102,000,000 resulting in an EGL liability of £45,900,000.

Example 2

As with the example set out in EGL63200, but now generating undertaking X has taken out hedging arrangements which fix the price realised to £65/MWh. This gives X a net shortfall of £72,500,000.

The amount of X’s shortfall of £72,500,000 that can be surrendered to Z is then restricted to the lowest of:

  • £67,500,000 under F(2)A23/S299(2) (being the amount of the shortfall that directly relates to X’s share of the generation of Z)
  • £62,500,000 under F(2)A23/S299(3) (being the amount of the exceptional receipts of Z that directly relates to X’s share of the generation of Z)
  • £72,500,000 under F(2)A23/S299(7) (being the total shortfall amount of X that relates to the overlap period, taking account of any other surrenders)
  • £115,000,000 under F(2)A23/S299(8) (while this is not a formal limit, there would be no value in Z claiming more than its total exceptional receipts)

As a result, X can surrender £62,500,000 to Z.

A surrender of this amount reduces Z’s net exceptional receipts to £52,500,000 resulting in an EGL liability of £23,625,000.

Example 3

As with the example set out in EGL63200, but now both X and Y have taken out hedging arrangements which fix the price realised to £65/MWh. This gives X and Y a net shortfall of £72,500,000 each.

As under example 2, X surrenders £62,500,000 to Z.

The amount of Y’s shortfall of £72,500,000 that can be surrendered to Z is then restricted to the lowest of:

  • £67,500,000 under F(2)A23/S299(2) (being the amount of the shortfall that directly relates to X’s share of the generation of Z)
  • £62,500,000 under F(2)A23/S299(3) (being the amount of the exceptional receipts of Z that directly relates to X’s share of the generation of Z)
  • £72,500,000 under F(2)A23/S299(7) (being the total shortfall amount of X that relates to the overlap period, taking account of any other surrenders)
  • £52,500,000 under F(2)A23/S299(8) (while this is not a formal limit, there would be no value in Z claiming more than its total exceptional receipts)

As a result, Y would only surrender £52,500,000 to Z.

The surrenders by X and Y reduces Z’s net exceptional receipts to £nil resulting in an EGL liability of £nil.

Note that X, Y and Z may agree that each of X and Y will surrender £57,500,000 to Z such that they each surrender an equal amount.

Example 4

As with the example set out in EGL63200, but now Z only achieves an average market price of £68/MWh. As a result, X achieves a profit of £72/MWh on its hedging arrangement.

Z’s shortfall is as follows:

Receipts £68,000,000

Benchmark deduction (£75,000,000)

Allowance (£10,000,000)

__________________

Net shortfall (£17,000,000)

X’s exceptional receipts before any claims from Z, will be as follows:

Share of Z’s receipts £5,000,000

Hedging profit £36,000,000

Allowance (£10,000,000)

__________________

Exceptional receipts £31,000,000

EGL of £13,950,000

The amount of Z’s shortfall of £17,000,000 that can be surrendered to X is then restricted to the lowest of:

  • £3,500,000 under F(2)A23/S299(5) (being the amount of the shortfall of Z that directly relates to X’s share of the generation of Z)
  • £36,000,000 under F(2)A23/S299(6) (being the amount of the exceptional receipts of X that directly relate to X’s share of the generation of Z)
  • £17,000,000 under F(2)A23/S299(7) (being the total shortfall amount of Z that relates to the overlap period, taking account of any other surrenders)
  • £31,000,000 under F(2)A23/S299(8) (while this is not a formal limit, there would be no value in X claiming more than its total exceptional receipts)

As a result, Z can surrender £3,500,000 to X.

A surrender of this amount reduces X’s net exceptional receipts to £27,500,000 resulting in an EGL liability of £12,375,000.