Implications of the resource rent tax on onshore wind

Abstract

To minimize disruptions to the socially optimal allocation of resources, it is essential to design taxes that are as neutral as possible. Resource rent, a super-profit generated from exploiting scarce natural resources, can theoretically be taxed neutrally. Successfully designing a neutral tax would enable the collection of necessary taxes to fund the welfare state without influencing investment decisions.

This thesis examines how the resource rent tax impacts future investments in the onshore wind industry and the broader consequences of the tax. The analysis is based on realistic cash flow models and sensitivity analyses. Data sources include survey responses from six wind power companies and five renewable energy analysts, in-depth interviews with four wind power companies, a consultation with a specialist auditor from the Norwegian Tax Authority, and data published by NVE. Since the tax framework has yet to be finalized, the research considers two possible scenarios. The difference between these scenarios is whether the government will provide payouts for negative resource rent tax.

In the scenario without payouts, the resource rent tax reduces the IRR by 3% from 6.3% to 6.1%. The tax does not pose a financial barrier and should have a minimal effect on future investment activity from a financial perspective. In the scenario where the government provides payouts for negative resource rent tax, the tax increases the IRR by 17% from 6.3% to 7.4%. This is a significant increase and should contribute to higher investment activity.

The introduction of the resource rent tax has increased the perceived political risk associated with Norway and reduced its competitiveness as an investment destination. This has led to a decline in international ownership and potentially reduced the country’s ability to attract capital for new wind projects. Additionally, the tax has failed to improve local acceptance, a key bottleneck for onshore wind development. There is also a potential spillover effect as there are concerns that the resource rent tax could eventually be implemented for offshore wind. This uncertainty about future regulatory conditions can stop new investments in the offshore wind sector, as investors are unsure of the framework governing their investments. Combined, these consequences threaten to slow wind power development in Norway, potentially shifting the country's energy balance from a surplus to a deficit.