Select Committee on Trade and Industry Written Evidence


Second supplementary memorandum by RWE npower

  At our evidence session with the Committee yesterday, we undertook to provide further a briefing on the tax anomalies that act against the development and construction of long-term low carbon investments.

  We believe it is reasonable for investors in new technologies to expect firstly, as an absolute minimum, to get tax relief for all their costs, and secondly, if there is not to be a disincentive then the tax relief in net present value terms for new projects should be worth no less than alternative less risky options.

  Two of the key features of the existing tax system which mean that such expectations cannot currently be met are:

    —    the treatment of development costs; and

    —    the economic low value of tax allowances for long term capital assets.

  On the first point, there is a real risk that some of the significant costs associated with developing low carbon options (such as clean coal or nuclear) would attract no tax relief at all. This could act as a major barrier to the private funding of this type of work, and is already starting to reduce the relative merits of potential UK windpower investments within our group compared to continental alternatives. This issue of "tax nothings" is covered in Annex 1, which is an extract from our Energy Review submission.

  The second point relates to the fact that capital expenditure designed to reduce carbon emissions would not only attract lower (and slower) tax relief than an equal amount of revenue expenditure achieving the same end, but also that capital assets with an assessed useful economic life of over 25 years (such as nuclear and clean coal) are even further disadvantaged. Annex 2 illustrates this, using an example relevant to carbon abatement. It shows that the tax treatment for long-life assets is equivalent to a 10% capital cost "penalty" relative to shorter-life assets and a 30% "penalty" compared to revenue expenditure. Given the highly capital-intensive nature of low-carbon technologies, the tax structure would be a key factor in investment choices.

  Whilst we welcome the fact that the Government has introduced 100% tax relief ("enhanced capital allowances") for certain energy saving investments (if they appear on the approved list maintained by the Carbon Trust), we are urging that this is extended to carbon saving investments. This would go a long way to offsetting the unintended penalty against capital investments. As an absolute minimum, we have asked that low carbon power plant investments are exempted from the long-life asset regime. We also believe the existing tax regime for Research and Development could usefully be reviewed with a view to more emphasis being placed on Development, clearly to include work on low-carbon technologies.

  I hope that the Committee finds this useful. Do let us know if you would find further briefing on these issues helpful. As discussed, we will also be sending you a note on planning issues, with reference to our proposed CCGT at Pembroke.

Alan Robinson

4 July 2006

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