EGL62300 - Significant minority shareholders in group companies: significant minority shareholders realising amounts relating to generation

F(2)A23/S297 addresses the situation where a significant minority shareholder in a company that is a member of a group generating undertaking enters into arrangements in relation to their share of the generation of the company invested in, or of a relevant subsidiary. The aim is for the EGL to take account of the minority shareholder’s position. F(2)A23/S296 (covered at EGL62200) sets out the treatment where a group company, or a relevant subsidiary, sells electricity directly or indirectly to such a shareholder.

The meaning of significant minority shareholder and relevant subsidiary can be found at EGL52000. The term “shareholder” is used as shorthand for “significant minority shareholder” in the following guidance but that term may apply to either a single company or a group generating undertaking. The rules apply equally to an investor in a group company that does not have share capital.

The treatment is very similar to that where a participant in a qualifying joint venture (JV) enters into such arrangements. Broadly, where a shareholder realises amounts from hedging output of the company or a relevant subsidiary, those amounts will be treated as additions or reductions to the shareholder’s exceptional generation receipts. This rule only applies in respect of generation that is not supplied (or is not expected to be supplied) to the shareholder (directly or indirectly). The generation to be considered includes that of any “relevant subsidiary” of the group company. Where a generating station is operated in partnership then the share of generation attributable to the group company or its relevant subsidiaries is to be included, F(2)A23/S297(3).

For example –

• A shareholder hedges the price at which the group company sells electricity to third parties and the shareholder makes a profit on that hedge. The return that the shareholder makes from that hedge would also be included in calculating its exceptional generation receipts.
• Alternatively, the shareholder may make a loss on the hedge described above. Then the loss would also be included in calculating its exceptional generation receipts.

Example

In 2023, a group company sells electricity to a third party off-taker at day-ahead prices. In the period it generated 100GWh 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 minority investor with a 25% interest in the group company 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 group company. The investor 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 investor receives additional net receipts of £20/MWh (being the difference between the fixed price and the average day-ahead price).

The investor 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 investor 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.

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

Equally, it is possible that the investor 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 group company to produce in the period. The proportion of the hedge which exceeds its share of the expected generation of the group company would not, therefore, be hedging its share of the group’s generation for the period. Only the proportion of the hedge that relates to the investor’s share of the group company’s generation will be brought into the charge of the levy.

Where the investor 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 investor’s net receipts are attributable to its share of the group company’s generation.

Offset of shortfalls

It may be the case that an investor 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 group company and its minority investors.

Alternatively, the group company and its investors may elect to treat the company as transparent under the rules – see EGL64000+ for details of this election.

Further guidance

The meaning of a “significant minority shareholder” and “relevant subsidiary” are explained at EGL52000.