UK faces legal action over windfall tax on energy companies

A UK developer of onshore wind farms is threatening the government with legal action unless it scraps or amends a new windfall tax on low-carbon electricity generators that will help subsidise household energy bills.

Community Windpower, a private company that operates eight wind farms in Scotland, has written to Treasury chief secretary John Glen claiming that the tax is “unfairly disproportionate, discriminatory and adverse to the government’s [2050] net zero [emissions] strategy”.

The Cheshire-based company is the first low-carbon electricity generator to threaten legal action against the government’s planned levy.

Community Windpower is warning that some of its proposed new wind farms will be put at risk by the windfall tax, and it has hired the law firm Mishcon de Reya to pursue the case.

Chancellor Jeremy Hunt announced the “electricity generator levy” in his Autumn Statement in November, to help raise funds for the government’s subsidy regime to partially shield households from high energy prices until April 2024.

The levy is intended to capture some of the “exceptional” revenues that low-carbon power generators have been making after wholesale electricity prices, which closely track those of gas, soared following Russia’s invasion of Ukraine.

Some low-carbon power companies have been securing even higher revenues as they benefit from a longstanding government subsidy scheme called the “renewables obligation”.

Hunt’s tax on low-carbon power generators will come into force on January 1 and is intended to raise more than £14.2bn by its anticipated withdrawal date of March 31 2028 by adding a 45 per cent charge on wholesale electricity sold at an average price in excess of £75 per megawatt hour.

Rod Wood, managing director of Community Windpower, said the £75/MWh level of the levy would effectively block new onshore wind projects because many developers have witnessed a big jump in their financing costs following recent turmoil in UK financial markets, while the price of turbines is also rising because of supply chain inflation.

“This needs to be made to work, otherwise there simply will be a moratorium on new investment in this sector,” said Wood, who called the levy a “smash and grab raid on renewables” that will “pull the rug out from under the UK’s efforts” to bolster its energy security and cut carbon emissions.

He said the levy was discriminatory as it only applied to low-carbon electricity generators including solar, wind, nuclear and biomass but controversially would not target gas and coal-fired power station operators, some of which have been reporting strong profits.

Community Windpower is urging the government to reconsider the level of the levy and make other changes, including the addition of an investment allowance similar to one that has been provided to oil and gas companies alongside a separate windfall tax on that sector to help pay for the cost of government support on household energy bills. The allowance is meant to encourage new fossil fuel projects in the UK North Sea.

Community Windpower has invested £500mn in wind farms since 2001, and it has proposed to increase this to £2bn by 2025. The company has benefited from the “renewables obligation” subsidy scheme.

The Treasury said the electricity generator levy was “not designed to penalise electricity generators” but was instead a “response to the fact that, as a result of exceptional and unforeseen geopolitical events, some electricity generators are realising extraordinary returns from higher electricity prices”.

“The continued investment of generators in the industry is vital to our long-term energy security, and this levy leaves them with a share of the upside they receive at times of high wholesale prices,” said the Treasury.