Increased tax burden for the energy industry – resource rent tax on wind and hydropower

The proposals are estimated to increase the tax revenue by approximately NOK 29.5 billion a year and could have significant consequences for the energy industry. The effect on the companies, or at least the fear of this effect, has already been reflected in developments at the Oslo Stock Exchange in the hours following the release of the proposal.

The current situation in Europe and Norway is demanding. With the war in Ukraine, an uncertain energy supply chain, and the lowest inflow of water to reservoirs we have seen in southern Norway in a long time, we are in the middle of an energy crisis the like of which we have not seen in a long time. Fluctuations in the price of fossil energy sources are extreme, and the price of gas is continuously hitting new highs. In a macro context, we understand the government’s need to present a tight budget, but we question whether this is the right time to increase the tax load on an industry that will be key in finding a way out of the energy crisis. Significant investments shall be made in the development of green power and green energy carriers in the years to come. The scope of the investments will require both old and new investors to participate. For investors and the industry to make the necessary long-term investments, it is crucial to have a predictable and competitive framework that also provides incentives to invest the large sums that will be required in the green transition.

To some extent, the introduction of higher taxes appears to be an ad-hoc measure to address several challenges with highly complex causes. We are unsure of how well-aimed the measure is and see several challenges related to the proposal. We long to see measures that address the causes of the increased prices, as well as measures for counteracting the unfortunate consequences that follow. Recently, the EU has been intensely at work on energy issues, both with regard to the green transition and measures to address the security of supply and energy consumption in the EU. One thing the EU has been working on, and that perhaps the Government should look into, are measures aimed at limiting energy consumption. Energy Efficiency First, which the EU has launched for Europe, has so far received little attention in Norway, but it could become highly relevant also for Norway in the time to come.

In the following we will give you an overview of the proposed changes, including the consequences for the wind and hydropower industry.

The Government is proposing to introduce a resource rent tax for onshore wind power plants with effect from 2023. Expectations of a continuously decreasing cost level and persistently high energy prices have been decisive for the Government's proposal. The effective resource rent tax rate is proposed set at 40 percent, which means that the formal resource rent tax rate will be set at 51.3 percent.

The Government proposes that the duty to pay resource rent tax shall apply to onshore wind power plants that are subject to licensing obligations under the Norwegian Energy Act, i.e. power plants that have more than five turbines or a total installed capacity of 1 megawatt (MW) or more.

The resource rent tax is designed as a cash flow tax, i.e. revenues and investments are taxed on an ongoing basis in the year in which they are earned/incurred.

Revenues from energy production shall generally be determined on the basis of spot market prices. However, the proposal includes an exception for energy production sold through existing fixed-price energy agreements entered into prior to 28 September 2022. In these cases, energy production is valued at the contract price. Exceptions for energy related to specific fixed-price contracts will also be considered. Revenues from the sale of guarantees of origin and electricity certificates will be included in the resource rent tax basis.

Operating assets acquired before the introduction of the resource rent tax may be deducted through ordinary depreciation on remaining tax values. Any negative calculated resource rent income may be carried forward with interest and be deducted from any positive calculated resource rent income in subsequent years.

Corporate tax is calculated before the resource rent tax, and resource rent-related corporation tax shall be deducted from the resource rent tax basis, equivalent as in the petroleum and hydropower sector. An effective resource rent tax rate of 40 percent means that the formal resource rent tax rate is set at 51.3 percent.

The Government further proposes to increase the production tax for onshore wind power from 1 to 2 øre/kWh and to make this tax deductible in the set resource rent tax.

Furthermore, it is proposed to introduce a new natural resource tax of 1.3 øre/kWh, where 1.1 øre will go to the municipalities and 0.2 øre to the county councils. The natural resource tax will be made deductible in the set resource rent tax.

The proposal will be circulated for consultation by the end of the year.

The Government proposes to increase the effective resource rent tax on hydropower from 37 percent to 45 percent, with effect from the fiscal year 2022.

Corporate tax is calculated before the resource rent tax on hydropower, and resource rent-related corporation tax is deducted from the resource rent tax basis. An effective resource rent tax rate of 45 percent imply that the formal resource rent tax rate is set at 57.7 percent. The total marginal tax (resource rent tax and corporation tax) is consequently 67 percent for hydropower, i. e. 11 percentage points lower than the total marginal tax for petroleum activities.

The government also proposes that revenues from the sale of guarantees of origin is included in the resource rent tax basis. Small hydropower plants do not pay resource rent tax and shall not be affected by the proposals.

The resource rent tax on hydropower is deducted from the property tax basis. Thus, the increase in the resource rent tax will result in a reduced property tax for the municipalities. When calculating the property tax basis, the deduction for resource rent tax is determined as an average of 5 years, meaning it will take some time before the full effect of the increased resource rent tax is reflected in the property tax basis. However, the change will not affect the property tax for power plants where the property tax is determined according to the minimum or maximum rules (which forms a floor and a ceiling for the property tax basis).

The government has also proposed a high-price contribution on wind and hydropower, given today's increased energy prices. The rate of the high-price contribution is set at 23 percent of the electricity price in excess of NOK 0.70 per kWh. The tax, which is designed as an excise duty payable to the public treasury, will be calculated hourly for each price area.

The high-price contribution shall apply from 28 September 2022 for hydropower plants with generators with a total rated output of 10,000 kVA or more. From 1 January 2023, the tax liability will also include hydropower plants of at least 1 MW (meaning that mini and micro power plants are not included) and wind power plants that are subject to licensing obligations under the Norwegian Energy Act.

The owner of the power plant is liable to pay the high-price contribution. For production communities that are not considered separate tax entities under section 2-2 subsection 2 of the Norwegian Taxation Act, and where the power accrues to the members, the tax liability lies with the individual member who draws the power. The taxable entity is responsible for reporting and paying the tax to the Norwegian Tax Administration.

The tax is calculated separately for 1) power valued at spot market price, 2) license power, 3) own power, 4) power in accordance with withdrawal rights, and 5) other contracts combined (for example, bilateral agreements and financial contracts).

The Government has proposed that the high-price contribution should not be deductible from the corporate tax. The national budget for 2023 will therefore include a proposal to amend the Norwegian Taxation Act accordingly. Since the high-price contribution is not an operating cost that usually arises from energy production, the government assumes that the high-price contribution shall not be deducted from the resource rent tax and the property tax.

For the taxation period 28 September 2022 to 31 December 2022, the first due date for the tax will be as early as 18 January 2023. For 2023, the tax shall be reported and paid to the Norwegian Tax Administration on a monthly basis.