On 12 December 2023, the Danish government and selected parties concluded an agreement aiming to promote the establishment of solar parks and onshore wind farms. However, since 1 January 2023, developers have had to pay the grid connection costs themselves, which has slowed down the green transition. This has increased the start-up costs and financial needs of developers; but help may be available through tax legislation.

Acceleration of the green transition and increased grid connection costs

The Danish government and selected parties recently concluded an agreement aiming to promote the establishment of solar parks and onshore wind farms. This is a tailwind for developers, who have experienced a significant increase in start-up costs since the beginning of the year.

At the turn of the year, the rules on the discontinuation of the equalization system entered into force, which meant, among other things, that developers must pay the grid connection costs themselves. The rules have particularly affected developers of solar parks and onshore wind farms, increasing their start-up costs. A report prepared by Green Power Denmark from 28 November 2023 estimates that the start-up costs of installing solar parks and onshore wind farms in certain areas have increased by DKK 1,000,000 and DKK 1,150,000 per installed MW, respectively, with part of the increase coming from the developer’s grid connection costs.

Tax treatment of grid connection costs

In addition to affecting the developer’s liquidity needs, the increased start-up costs also affect the developer’s taxable income, as start-up costs are generally not depreciable or deductible. This is because start-up costs do not have the “necessary” connection to the developer’s current earning of income, but instead relate to the developer’s asset base. When the cost cannot be depreciated or deducted, the developer’s taxable income and liquidity needs are negatively impacted.

However, there is a special rule according to which a cost incurred in connection with a company’s connection to publicly or privately owned facilities that are of commercial importance to the company can be depreciated by up to 20% annually.

The scope of the rule is broad and according to case law the rule includes, for example, costs incurred when connecting a wind turbine to an electricity grid owned by a third party when the wind turbine is used for commercial production of electricity (as opposed to private electricity consumption) and the connection to the grid is necessary for the commercial production.

By applying the rule correctly, a developer can thus write off a grid connection cost in its taxable income, thereby optimising the developer’s cash flow and liquidity needs.

We have in-depth knowledge of the energy and infrastructure industry and provide specialised tax advice to all industry players. If you have any questions about the tax treatment of grid connection costs, we are here to assist you.

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