New low-carbon generating schemes exempted from UK windfall tax

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New low-carbon power generating schemes, including wind farms, will be exempt from the UK’s windfall tax on the sector as part of government measures aimed at boosting investment. 

The Treasury said on Wednesday the exemption from the so-called Electricity Generator Levy, which was introduced last year during the energy crisis, would come into effect immediately for projects awaiting approval. 

The tax was designed to target excess profits made by generators as electricity prices soared in the wake of Russia’s full-blown invasion of Ukraine. But developers of generating assets criticised the measure, arguing it would deter investment and was unfair as it did not apply to gas-fired power stations. 

Rod Wood, managing director of onshore wind developer Community Windpower, said the exemption was a “step in the right direction”. In September, the company partly blamed the windfall tax for its decision to halt work on a wind farm in southern Scotland, its biggest project to date.

“We have worked hard to express just how much damage the Electricity Generator Levy has been doing to investment in new renewable developments,” he said.  

“Other hurdles remain, however — including a high inflationary environment and supply chain blockages — but today’s announcement is a welcome step in the right direction”.

Emma Pinchbeck, chief executive of trade group Energy UK, said the exemption was a “welcome sign that the government [was] listening to the energy industry on the need to do more to attract investment in clean energy and technologies in the face of growing international competition.”

The move is one of several steps taken by the government aimed at boosting investment in clean energy as concerns mount that the UK is set to miss its ambitious targets for low-carbon generating capacity.

Measures confirmed on Wednesday include planning reforms to make it easier to build new wind farms and electricity pylons needed to ensure the power can be distributed around the country. Other changes are designed to cut the long waiting times to connect new generating capacity to the grid.

Last week, the government announced it was increasing the level of subsidy available for new renewables projects in its next “contracts for difference” auction after the last round earlier this year failed to attract any bids from offshore wind developers.

Zoisa North-Bond, chief executive of Octopus Energy’s generation arm welcomed measures to speed up grid connections but said the electricity market also needed overhauling. 

The Electricity Generator Levy was introduced in last year’s autumn statement amid concerns that wind farms and others were making excess profits as a knock-on effect of turmoil in gas markets triggered by Russia’s war on Ukraine. 

Electricity prices in Britain rose sharply following a surge in the price of gas, which is used to generate more than a third of Britain’s electricity.

Under the levy, renewable, nuclear and biomass operators pay 45 per cent tax on revenues when wholesale prices exceed £75 per MWh. It does not apply to generating capacity built under the government’s contracts for difference scheme. The levy is set to end on March 31, 2028.

According to figures published by the Office for Budget Responsibility on Wednesday, the levy is expected to raise £1.4bn in 2023-24, falling to £0.3bn in 2027-2028.