Rising business rates a burden to the energy industry
Why Storengy UK advocates for a fairer, more predictable and sustainable business rates and review process.
Business rates must be reviewed timely, ideally every year to reflect trading conditions. Schemes that delay effective application of Rateable Value must be avoided, for businesses like ours to be able to deliver their plans to invest more towards the green energy transition to meet net zero targets.
Storengy UK (Storengy) is the largest gas storage facility in the UK. Over the last decade, the business spent close to £600 million in developing and building 20 caverns and a gas plants. From 2014, Storengy began its commercial operation and now offers multiple fast cycled products in the gas storage market.
Storengy operates in a volatile market. Its product pricing is dependent on gas market seasonal spread (price difference between summer and winter) as well as spot prices which are determined by supply and demand in the gas market. Post Storengy’s initial Financial Investment Decision (FID) made in 2007, the gas price collapsed in 2013.
The company impaired £340 million of its asset value. Despite the challenges, innovative and flexible products were introduced in recent years to meet our customers’ needs. However, Storengy continues to operate under regulatory uncertainties, among which is business rates.
Storengy UK pays more than £5 million business rates per annum, which counts close to 40% of its operating expenses. Given gas can flow between the UK and the Continent at minimal cost and its European competitors only pay tens of thousands a year in property tax, it puts UK storage operators in a significantly disadvantaged position. In addition, it has a direct impact on business investment decisions.
There is typically a long lag between an investment decision being made and the investment becoming commercially viable and generating returns for the business. The size of the investment required up front as well as subsequent investments required to maintain assets are often significant, with returns only realised over several years.
Consequently, investment decisions are based on long-term assumptions about the tax and regulatory environment, of which business rates is a factor. Storengy profitability is highly sensitive to short-term market changes and therefore long valuation periods are particularly distortive. The rising Uniform Business Rate (UBR) over the years together with the Transitional Relief mechanism continues to add burden to the industry and does not reflect commercial reality.
The company, through various channels, has advocated for a fairer, more predictable and sustainable business rates and review process. This includes more frequent assessment and reasonable Rateable Value (RV). The RV assessment was due to be conducted in April 2021, however this has now been postponed by a further 24 months.