Themes of the Year: Investors to mostly shrug off market regulations and windfall taxes

The notion of what makes an investment and a country low risk was challenged in 2022 as global energy producers and developers faced new taxes and regulatory measures.

Desperate times called for desperate measures and a multitude of new taxes and market regulations for energy producers were introduced in 2022. However, the temporary nature of the measures, along with widespread recognition that renewable developments must be encouraged, suggest the impact on the private infrastructure market will be limited.

While the effect of Russia’s war is felt all around the globe, the regulatory response has been more geographically limited. The UK and Europe (bar Serbia), North America, Japan, New Zealand and Australia have imposed sanctions against Russian individuals and trade with the country. Meanwhile, the rest of the world, including India, China and Israel, has maintained or expanded its usual relations with Russia.

As for taxes, this is a Europe-only affair.

New European energy taxes

This year has been very good for anyone with income derived from generating electricity and exposure to the merchant market. In fact, it was too good to last and an obvious place for governments to come looking for taxes.

Accordingly, the EU announced an emergency regulation on 6 October 2022 which included enforced demand reduction, new taxes on “surplus revenues” for electricity generated by means other than hard coal, hydro reservoirs and natural gas and a windfall tax, neatly named “solidarity contribution” on fossil fuel companies.

A cap of €180/MWh on the price paid for natural gas in the EU from 15 February has been agreed. This may limit the supply of LNG to Europe but does little to deter European producers and developers as the cap is quite high.

The EU emergency measures are temporary with most taxes liable from 1 December 2022 to 30 June 2023, and every country is allowed to impose stricter measures should they feel so inclined. And some did indeed do just that: among others, Germany, the Netherlands, Poland and France decided to give electricity generators a much closer shave.

Bearing in mind that €70/MWh was the average price for a 10-year renewable power purchase agreement only a year ago, taxation on wind and solar revenues above €130/MWh (The Netherlands) or even €100/MWh (France) might seem generous.

However, higher costs of financing and construction have sent PPA prices well above €100/MWh already, cutting margins considerably.

If the measures remain temporary as planned then the effect on investments is likely to be limited. It is, though, a timely reminder to core infrastructure investors that nothing in life is certain – except death and taxes.

UK measures extend to 2028 while Norway goes for the throat

The UK, going at it alone, extended its fossil fuel windfall tax, or Energy Profits Levy, to 2028 and raised it from 25 to 35 percent. It will apply alongside a 45 percent windfall tax on excessive renewable generation proceeds from the largest producers only; this should raise a total of £14 billion ($17 billion; €16 billion) over the coming years, according to the UK Treasury, but would presumably leave the producers with even more than that.

The UK’s comparatively soft touch on wind power is in strong contrast to Norway, which is also not part of the EU and an onshore wind-power sceptic to boot; here, the tax knife was put into wind-power generators so deep this year that it may be a while before anyone asks for onshore wind permission in Norway again.

Over the holidays, European legislators might want to ponder the conclusion of a very recent think tank report: The existing system for pricing electricity is quite decent; improve the flow and flexibility and all shall be well.

As 2022 fades and 2023 awaits, some factors will be given new weight when establishing country risk for investment purposes, though the extent of the changes to perceived risk will be difficult to gauge for a while in the new high-interest rate environment.

Proximity to an untrustworthy and expansionist power is one that will likely gain more prominence, while energy security will move even further up the list of priorities. Who can, literally, keep the lights on?

Here’s to a happy 2023!