Norwegian local and regional authorities lose billions due to tax changes

THEMA has assessed the consequences of changes to generator taxes on the local and regional authorities that own generation assets. The changes result in the central government taking a significant share of the cash flow genrated and reduce the value of ownership.

Waterfall

Norwegian local and regional authority-owned hyperpower and wind assets generate about 60 TWh annually. In the national budget for 2023, the national government proposed changes to the tax system applicable to Norwegian generation assets. The changes include the introduction of a high-price contribution to be paid by hydropower and wind generators, an increase in the resource rent tax applied to hydropower and the introduction of resource rent taxation for wind power. These proposals entail a redistribution of cash flows among local and regional authorities due to their extensive ownership of affected generation assets. Almost all the proposed changes have now been adopted. Only the implementation of resource rent taxation for wind power remains to be implemented.

In recently completed work for The Norwegian Association of Local and Regional Authorities (KS), THEMA examined the financial consequences of the new tax system for local and regional authorities, including how it affects the value of their ownership in power companies. Based on various scenarios for the development of power prices, we estimated the value of ownership both with and without the changes to the tax system.

Under our normal price scenario, and without the changes to the tax system, the total value of local and regional authorities’ ownership shares is estimated to be NOK 291 billion, of which NOK 287 billion is in hydropower assets subject to resource rent taxation and NOK 3.6 billion is in wind power assets. Ownership in small-scale hydropower is not included.

The tax changes result in the central government taking a significant share of the cash flow produced by these assets, thereby reducing both the asset’s ability to pay dividends and the value of ownership. We estimate that the tax changes reduce the total value of ownership by 24 percent. The reduction in the value of equity is thus NOK 70 billion, of which NOK 22 billion is due to the impact of the high-price contribution and NOK 48 billion is due to increases in resource rent taxation. If we also consider debt, the reduction in value is 30 percent, which results in a significant drop in the ability to pay dividends.

For local and regional ownership in wind power plants, the relative drop in value is higher, with an estimated loss of value of 60 to 70 percent of total capital. For wind power, the ability to support dividends is not merely reduced, but significant injections of capital may in fact be required to meet loan obligations.

As resource-rent-tax liabilities for hydropower can be deducted from the property tax base, increased resource rent taxation also reduces the property tax income raised by local governments. Our calculations indicate that property tax revenues from hydropower plants will be reduced by an estimated NOK 100 million annually in real terms in the long term. However, this effect is only realised towards the end of the 2040s. Before then, upper limits to the property tax base will limit or eliminate the impact of increases to resource rent taxation.

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