• British system: The British capacity mechanism, introduced in 2014, is based on a system of auctions for operators, organised by the network operator “National Grid” to procure capacity 4 years ahead of delivery; delivery years run from 1 October to 30 September. Capacity operators which have been successful at the auctions are remunerated in the year of delivery out of a fund consisting of contributions from electricity suppliers.
  
  The electricity suppliers’ contribution to this mechanism is proportional to their sales to customers in the peak period and the cost of capacity is passed on to final customers through their sale price.
  
  EDF Energy is concerned by both aspects of this system, as an operator of electricity plants and a supplier.
  
  For accounting purposes, the remuneration received in its capacity as an operator is recognised in sales revenues in the year of delivery and the contribution paid to the mechanism in its capacity as an electricity supplier is recognised in expenses over the peak period. The cost of the capacity mechanism passed on to final customers is recognised in sales revenues as and when the electricity is delivered.
  
  On 15 November 2018, the UK’s Capacity Market was suspended after a ruling by the European Court of Justice concluding that it did not comply with EU rules on state aid. No capacity market revenues were thus recognised for the suspension period in 2018.
  
  On 24 October 2019, following an in-depth investigation, the European Commission reapproved the UK capacity market scheme under EU State aid rules. The decision enabled payments that had been suspended since November 2018 to be made. Suppliers were required to make back-payments of the capacity supplier charge in 2019 and capacity providers have recognised revenue for the whole standstill period with cash received in January and February 2020.
• Italian system: A capacity market was set up in 2019 using rules approved in a decree of 28 June 2019 issued by the Economic Development Ministry.
  
  This mechanism is based on an auction process organised by TERNA, the Italian transmission grid operator, for each delivery year. Operators of existing and future production or storage units can participate in the auctions. The operators of the capacities selected are paid through a fixed premium during one year for existing capacities and 15 years for future capacities. The fixed premium is paid during the delivery year.
  
  The selected operator must offer its capacity on the day-ahead market (Mercato del Giorno Prima) and the balancing market (Mercato per il Servizio di Dispacciamento). If the selling price on these markets reaches a level exceeding a strike price defined by the Italian Regulatory Authority for Energy, Networks and Environment (ARERA), the operator must repay the surplus to TERNA.
  
  Two auctions were held during 2019 for delivery dates set in 2022 and 2023, and Edison won 3.8GW for 2022 and 3.3GW for 2023 for an annual price of €75,000/MW for new capacities and €33,000/MW for existing capacities.
  
  The fixed premium will be recorded in income during the corresponding delivery year, and reduced by any repayments to TERNA or if the capacity is unavailable.
  
  

1.3.8 Income taxes

Income taxes include the current tax expense (income) and the deferred tax expense (income), calculated under the tax legislation in force in the countries where earnings are taxable.

In compliance with IAS 12, current and deferred taxes are generally recorded in the income statement or in equity symmetrically to the underlying operation.

Under IAS 32, income taxes on distributions to holders of equity instruments (notably dividends and the remuneration paid to holders of perpetual subordinated bonds) must be recognised in accordance with IAS 12. The Group considers that these distributions are paid out of previous years’ accumulated profits and as a result the associated tax effects are included in the net income for the period.

In application of IFRIC 23, a tax asset or liability is recognised when there is uncertainty over income tax treatments. If the Group considers it likely that the tax authorities will not accept its chosen treatment, it recognises a tax liability, and if it considers it likely that the tax authorities will reimburse a tax that has already been paid, it recognises a tax asset. The tax assets and liabilities relating to these uncertainties are estimated on a case-by-case basis and stated at the most likely amount, or the weighted average of the various outcomes considered. These tax assets and liabilities are included in deferred taxes.

The current tax expense (income) is the estimated amount of tax due on the taxable income for the period, calculated using the tax rates adopted at the year-end.

Deferred taxes result from temporary differences between the book value of assets and liabilities and their tax basis. No deferred taxes are recognised for temporary differences generated by:

• goodwill which is not tax deductible;
• the initial recognition of an asset or liability in a transaction which is not a business combination and does not affect the accounting profit or taxable profit (tax loss) at the transaction date;
• investments in subsidiaries and associates, investments in branches and interests in joint arrangements, when the Group controls the timing of reversal of the temporary differences, and it is probable that the temporary differences will not reverse in the foreseeable future.
  
  

Deferred tax assets and liabilities are valued at the expected tax rate for the period in which the asset will be realised or the liability extinguished, based on tax rates adopted at the year-end. If the tax rate changes, deferred taxes are adjusted to the new rate and the adjustment is recorded in the income statement, unless it relates to an underlying for which changes in value are recorded in equity, for example in accounting for actuarial gains and losses or fair value on hedging instruments and debt or equity securities.

Deferred taxes are reviewed at each closing date, to take into account changes in tax legislation and the prospects for recovery of deductible temporary differences. Deferred tax assets are only recognised when it is probable that the Group will have sufficient taxable profit to utilise the benefit of the asset in the foreseeable future, or beyond that horizon, if there are deferred tax liabilities with the same maturity.

Deferred tax assets and liabilities are reported on a net basis, determined at the level of a tax entity or tax group.

1.3.9 Business combinations

In application of IFRS 3 business combinations arising since 1 January 2010 are measured and recognised under the following principles:

• at the date of acquisition, the identifiable assets acquired and liabilities assumed, measured at fair value, and any non-controlling interests in the company acquired (minority interests) are recorded separately from goodwill;
• non-controlling interests may be valued either at fair value (full goodwill method) or their share in the fair value of the net assets of the acquired company (partial goodwill method). The decision is made individually for each transaction;
• any acquisition or disposal of an investment in a subsidiary that does not affect control is considered as a transaction between shareholders and must be recorded directly in equity;
• if additional interests are acquired in a joint venture, joint operation or associate without resulting in acquisition of control, the value of the previously-acquired assets and liabilities remains unchanged in the consolidated financial statements;
• if control is acquired in stages, the cost of the business combination includes the fair value, at the date control is acquired, of the purchaser’s previously-held interest in the acquired company;
• related costs directly attributable to an acquisition leading to control are treated as expenses for the periods in which they were incurred, except for issuance costs for debt securities or equity instruments, which must be recorded in compliance with IAS 32 and IFRS 9;
• IFRS 3 does not apply to common control business combinations, which are examined on a case-by-case basis to determine the appropriate accounting treatment;
• commitments given by the Group to purchase minority interests in Group-controlled companies are included in liabilities. For commitments of this kind given since 1 January 2010, the date of the Group’s first application of IAS 27 (amended) and IFRS 3 (revised), the differential between the value of the non-controlling interests and the liability corresponding to the commitment is recorded in equity.