De facto UK windfall tax on green energy is ‘catastrophic’, sector warns

The UK government’s de facto windfall tax on low carbon electricity companies will have “catastrophic consequences” for investment in green technologies such as wind and solar, energy companies have warned.

Energy UK, a trade body that represents companies including Centrica, EDF Energy, ScottishPower and SSE, this weekend joined criticism of the government’s revenue cap on low carbon electricity generators, which was confirmed by Liz Truss’s government before she stepped down as prime minister.

The policy, which was introduced to raise funds for the government’s energy bills support scheme for households and could remain in place until the end of 2027, is included in a controversial energy prices bill that is still progressing through parliament. However, ministers are yet to confirm the level of the cap.

It applies to companies that own low carbon electricity generation assets such as wind and solar farms, plus nuclear and biomass power plants. Gas-fired power plants are excluded despite also benefiting from the surge in wholesale power prices following Russia’s full blown invasion of Ukraine.

Energy companies have branded the policy an effective windfall tax and are concerned it is even more punitive than a separate levy on oil and gas producers, which was introduced by former chancellor Rishi Sunak in May.

Energy UK has sent a briefing to all MPs ahead of chancellor Jeremy Hunt’s fiscal statement — expected on October 31 — warning that the cap, as it is currently designed, would “cement a tax regime heavily tipped in favour of oil and gas, and send a disastrous message [to global investors] about the UK’s climate commitment”.

The group argues that while the levy on oil and gas — which raised fossil fuel producers’ headline tax rate from 40 to 65 per cent — is charged only on profits, the cap will limit its members’ profit opportunities, which is potentially even more damaging.

The group also points out that Sunak’s so-called energy profits levy on fossil fuel producers was accompanied by a generous investment allowance that companies can use to reduce their tax bill if they embark on new drilling operations.

The oil and gas levy includes a sunset clause that would remove it at the end of 2025, whereas the energy prices bill would hand ministers the power to keep the revenue cap in place two years longer, until the end of 2027, Energy UK warns.

Unless similar allowances are built into the revenue cap, the government will “penalise investment in clean, cheap, low-carbon generation in favour of polluting oil and gas extraction”, the briefing says.

A “poorly designed” revenue cap would be “an unprecedented policy that could have catastrophic consequences for the investment needed to safeguard both our climate targets and energy security both this winter and beyond”, the briefing adds.

Energy companies are hoping a new Conservative prime minister will pause some of Truss’s initiatives and work with the sector to design better solutions to the energy price crisis.

A spokesperson for the government said: “We are taking action to temporarily decouple gas and electricity prices and set a fair price for low carbon electricity generation and will shortly be running a consultation on the Cost-Plus Revenue Limit to ensure that interested parties can have their say on its design.”

 “The Energy Prices Bill comes alongside longer-term measures in place to reform the energy market, giving Britain back control of its own homegrown energy and breaking ties to the ever-increasing volatility and uncertainty of the global gas market.”