UK looks to cap renewable electricity generator revenues

The UK government is pressing ahead with plans to cap revenues that renewable electricity generators are making from sky-high wholesale power prices following Russia’s invasion of Ukraine.

Companies generating power from wind and solar fear the plans, similar to proposals already announced by the European Union, will effectively amount to a windfall tax on renewable energy.

The businesses involved in renewable power generation that could be affected include EDF Energy, RWE, ScottishPower and SSE.

The government had been hoping to persuade electricity generators to agree voluntarily to 15-year fixed-price contracts well below current wholesale rates for their output.

But talks with the companies have collapsed and government legislation, which could be unveiled as early as next week, will be used to underpin a revenue cap on the generators, said people familiar with the plans.

With UK households contending with soaring energy bills, the government indicated to generators at a private meeting last week that it would pursue a cap, said people briefed on the discussions.

People briefed on last week’s meeting said prices of about £50 to £60 per megawatt hour were mentioned as a starting point for the cap, well below current prices of about £490/MWh, although no final decisions have been taken.

Ministers have been alarmed at profits being made by some electricity generators that are still benefiting from a government subsidy scheme that dates back to 2002, when the renewable industry was in its infancy.

The government has been examining potential levels for the revenue cap using evidence such as wholesale prices prior to the energy crisis.

A “high percentage” or all of the revenues above the cap set by the government would be paid to the Treasury, added one of these people.

The EU has announced a similar cap as part of plans to raise €140bn in windfall taxes.

Electricity generators fear the UK government’s plans will be more damaging to the sector than a 25 per cent windfall tax imposed on oil and gas companies in May by the then chancellor Rishi Sunak.

His 25 per cent “energy profits levy” was accompanied by a new investment allowance that energy companies can use to offset their tax bills if they press ahead with projects to boost UK production of fossil fuels.

“The major issue is not that the government is doing a windfall tax in some shape or form,” said one industry person who attended last week’s meeting between the government and electricity generators.

This person objected to how oil and gas companies affected by the recent windfall tax benefited from an investment allowance, and accused the government of effectively endorsing fossil fuel investment over renewable technologies.

The government is committed to the UK reaching net zero carbon emissions by 2050.

Another industry person briefed on the talks between ministers and the electricity generators said: “You’re disincentivising technologies you can build quickly to lower [energy] bills.”

The Department for Business, Energy and Industrial Strategy declined to comment on the plans.

The government’s efforts to persuade electricity generators to agree voluntarily to 15-year fixed-price contracts were complicated by how ministers wanted deals that can have an impact this winter, and most companies had already agreed to sell their expected production far in advance.

The government last month announced that UK households’ energy bills would be capped at an average of £2,500 per annum for the next two years.