The Budget for 2023 included proposals to both increase the resource tax (“grunnrenteskatt”) placed on hydropower generation and introduce a new tax covering both hydro- and wind power, the so-called high-price levy (“høyprisbidrag). The introduction of resource taxation for wind generation was also proposed and has been the subject of consultations since Winter 2023. The original proposals suggested that this tax would be introduced from January 1st, 2023, although this has now been delayed until January 1st, 2024. A final proposal is expected during Autumn 2023.
THEMA has helped Energy Norway/Renewables Norway analyse the impact of the changes to the tax regime announced in the Autumn 2022 and Winter 2023. We have also supported the umbrella organisation for Norwegian municipalities (KS) to analyse the distributional effect of the changes, as value is transferred to central government from the municipalities, many of which own generation companies. The findings of these analyses are summarised below.
The increase in the effective rate of taxation for large-scale hydropower generation, from 37 to 45 percent, has a big distributional impact, with the central government taking a large share of the value of existing generation assets. Since the resource tax is levied on cash flows and is settled on an ongoing basis, the change does not affect investment incentives for new generation. It does, however, reduce hydropower generators’ incentives to hedge power price risk, as the tax system itself effectively hedges a greater share of their generation for them.
The increase is unlikely to strengthen confidence in the stability and predictability of the tax regime, not least since the increase was first announced in September 2022 and then implemented with effect from January 1st, 2022, i.e. retroactively. It also comes just one year after significant reforms to the resource tax system to use cash flow as the basis of taxation, precisely to support investment incentives.
The so-called high-price levy—a tax on generation incomes earned on prices in excess of 70 øre/kWh—will, according to pollical statements, be phased out by the end of 2024. In that event, it is unlikely to have much effect other than in contributing to greater investor uncertainty. If the tax proves persistent however, it will significantly weaken incentives to invest in capacity expansions at existing hydropower plants, as these rely on revenues earned by providing extra power during short, high-price periods. It will also reduce the profitability of investments intended to increase generation. This is true of investments in both hydropower and wind.
The proposed resource tax on wind power would also harm investment incentives. Unlike the resource tax levied on hydropower, the tax value of investment spending will not be immediately settled or otherwise deductible from other generation revenues. Instead, the deduction must be carried forward with interest and then either deducted from revenues or else paid out at the end of the wind park’s economic lifetime. The Ministry of Finance proposes to use the risk-free interest rate to carry deductible values forward, a level that is insufficient to leave investors neutral. Other features of the proposals may also dissuade investments, such as the fact that payments to landowners are non-deductible and the fact that decommissioning costs must be set aside and fully financed before they can be deducted. The resource tax may also somewhat reduce incentives to enter into a Power Purchasing Agreement potentially reducing the availability of such agreements for industrial users. Again, this is because generators need to account for the hedging effect of the tax system and, in doing so, to reduce the volumes provided through long-term contracts. This may also affect the ability of PPAs to reduce financing costs. Taken together , the introduction of resource taxation on Norwegian wind generators is likely to impose an additional cost of 8-13 øre/kWh, depending on the assumptions used.
A resource tax on wind generation will also result in a transfer of wealth to the state from existing generators. However, the size of the change is limited by the fact that much existing generation is committed to supply long-term contracts, a fact that is expected to be accounted for when the tax is introduced.
The idea of applying resource taxation to small-scale hydropower has also been raised again, this time by the Torvik Committee, which published its report, ‘A Comprehensive Tax System’ (NOU 2022:20), in December. THEMA recently analysed the consequences of a possible resource tax on behalf of the Norwegian Association of Small-Scale Generators (‘Småkraftforeninga’) in connection with the consultation on the Committee’s report. One of the main findings is that fewer projects will be profitable because payments to landowners are not deductible. According to our analysis, these projects would collectively generate 1–2 TWh annually. Those projects that remain profitable in the face of a tax will have see payments to landowners markedly reduced. Again, the introduction of the tax implies a significant transfer of value to the state. It also risks significantly reducing the profitability of generation assets, especially in central and northern Norway. Over time however, there is reason to believe that the tax burden on existing plants will fall to landowners through lower rental payments.
