British low-carbon generators face de facto windfall tax

Low-carbon electricity generators, which have benefited from high wholesale power prices, will face a de facto windfall tax aimed at raising “billions of pounds” when it comes into force at the start of next year, the UK government has confirmed.

The decision to impose a revenue cap on companies in England and Wales that generate power from onshore wind, solar, biomass and nuclear comes after ministers failed to secure a voluntary agreement with them to sign 15-year, fixed-priced contracts.

The government late on Tuesday confirmed the move, first reported by the Financial Times, although without fixing most of the important details, including the level of the cap, which it said would be subject to further consultation.

Officials said one relevant factor that would be taken into account during negotiations would be “pre-crisis expectations for wholesale prices, and what a reasonable upper estimate for what those might be”. UK ministers are liaising with the Scottish government to extend the policy to Scotland, where the majority of Britain’s onshore wind farms are located.

Generators affected by the cap include SSE, ScottishPower, EDF Energy, Centrica, Drax, Octopus, RWE and Greencoat UK Wind. RWE UK country chair Tom Glover said the measure was a “de facto ‘windfall tax’ on low-carbon generators that, if not designed and implemented correctly, could have severe negative consequences for investment in the renewable and wider energy market”. 

UK prime minister Liz Truss insisted throughout her successful Tory leadership campaign that she was totally opposed to windfall taxes on the energy sector, even though she has not scrapped a 25 per cent “energy profits levy” on oil and gas companies — introduced by former chancellor Rishi Sunak in May.

But government officials insisted the planned intervention differed from a windfall tax because it would “be applied to excess revenues generators are receiving, as opposed to applying to all profits”.

Keith Anderson, chief executive of ScottishPower, said it was “disappointing that such a significant market intervention by the government has come with so little detail”, adding: “All this does is create uncertainty.” He also questioned why gas-fired power generators were not included in the measure.

The revenue cap will apply to all low-carbon generators, except those using newer technologies such as offshore wind that are already subject to fixed-price contracts. It is designed to limit excess revenues that some electricity generators have been making as a result of wholesale power prices soaring following Russia’s full-blown invasion of Ukraine.

The way the British electricity market is designed means that wholesale power prices closely track those of gas because the most expensive power plant needed to meet demand on any given day — usually a gas-fired power plant — sets the price for the entire market. This is the case even though technologies such as wind and solar generate very cheaply once built.

The UK intervention is similar to a policy that was announced by the EU last month. Under the EU’s proposals, non-gas generators have to pay member states the majority of the “excess profits” they generate beyond a threshold of €180 per megawatt hour.

SSE said the revenue cap must at the very least be set “at a level that doesn’t discourage essential investment in the UK’s renewable energy sector and therefore should be comparable to other countries, particularly given the €180 [per megawatt hour] cap being implemented by the EU”.

Labour’s shadow climate and net zero secretary, Ed Miliband, said: “The government has finally accepted the principle of Labour’s call for a windfall tax on excess profits of electricity generators.”

Additional reporting by David Sheppard in London