The UK Government has set out plans for a temporary revenue limit on low-carbon electricity generators, which has been called a ‘de-facto windfall tax’ by the renewable energy industry.
Following Russia’s invasion of Ukraine gas prices have increased expeditiously across Europe and Britain, driving up the cost of electricity.
Renewable producers can sell their energy on the wholesale energy market at the same cost as fossil fuel generators, but without incurring the high costs associated with the production in the first place. The new measure would apply to these low-carbon generators.
“Low-carbon electricity generators are therefore benefiting from abnormally high prices, while consumers are having to pay significantly more for energy generated from renewables and nuclear, even though they often cost less to produce,” said the Department for Business, Energy and Industrial Strategy (BEIS).
How does the wholesale energy market work?
The wholesale energy market is where energy is traded between generators and suppliers before ending up with the consumer. Suppliers, such as British Gas, purchase energy from generators at wholesale prices before adding a mark-up and selling it to their customers.
Regardless of how the energy is produced, the cost per unit remains the same at each moment. The price is set every half hour based on the cost of the ‘last generating unit’ to be turned on to meet demand. As gas production accounts for around 50% of the country’s energy generation, this is invariably the cost applied to each unit on the market.
What is the government proposing?
The “Cost-Plus-Revenue Limit” forms part of a broader energy support package announced by Prime Minister Liz Truss last month. The package put a cap on the price of average household energy bills.
Shadow energy secretary Ed Miliband supported the government’s decision to introduce the cap, but said the government was “essentially doing a windfall tax” after Labour had called for it months earlier.
However, speaking on Radio 4’s Today programme, Business and Energy Secretary Jacob Rees-Mogg insisted the move did not amount to a windfall tax on the firms involved.
“It is clearly not a tax. It’s nothing to do with the profits these companies are making,” he said. “It is to do with the pricing structure agreed with the renewable companies to ensure a good, long-term approach. To call it a windfall tax is simply mischaracterising what has been done, and misunderstands how the market works.”
A windfall tax on the UK oil and gas sector was introduced on 26 May, described as a 25% Energy Profits Levy, applying to companies that extract UK oil and gas.
Similarly to Britain, the European Commission has proposed a price limit of 180 euros ($175) per megawatt hour (MWh) on the revenue that renewable generators get for their power in their market.
The announcement has been met with backlash from a number of power generator companies. Tom Glover, County Chair of RWE UK, the country’s third-largest renewable generator said the cap was a “de-facto windfall tax on low-carbon generators. If not designed and implemented correctly, it could have severe negative consequences for investment in renewables and the wider energy market.”
A spokesperson at electricity company SSE added: “Any revenue cap must 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 euro cap being implemented by the EU.”
So far, no details have been given on the expected revenue price limit for the scheme, which applies to generators in England and Wales. BEIS said the measures would come into force at the beginning of 2023.
The government also revealed it was legislating to run a voluntary Contracts-for-Difference (CfD) process for existing low-carbon generators in 2023. The CfD scheme is the government’s main system for supporting low-carbon electricity generation.
A voluntary contract would allow generators longer-term revenue certainty and safeguard consumers from further price rises, the government said. RWE’s Glover said this was the most efficient and investor-friendly way to de-link the electricity price from the marginal gas price.
