Second supplementary memorandum by RWE
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
the treatment of development
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.
4 July 2006