Jeremy Hunt is reportedly preparing to hit electricity generation companies with a 40% windfall tax on their “excess returns” as he attempts to fund measures to ease the cost of living crisis.
The chancellor is considering a levy on the extra profits made by generators above a certain price per megawatt hour, which has yet to be decided.
Hunt is also planning to toughen the existing windfall tax on North Sea oil and gas operators, raising the tax from 25% to 35% and extending it by two years until 2028.
The two windfall taxes are expected to generate £45bn over six years depending on movements in energy prices, according to the Financial Times. The North Sea windfall tax had been forecast to raise around £28bn over four years.
The move to curb the profits on electricity generators represents a departure from the former prime minister Liz Truss’s plan to cap the revenues of renewable and nuclear power producers from next year, in line with the EU’s “revenue cap”.
Officials have spent more than six months examining methods of taxing electricity generators, which have enjoyed big profits on the back of soaring power prices – linked to the rising wholesale cost of natural gas – while their costs remained largely stable.
The government has worked on plans to shift companies on a voluntary basis to contracts for difference, which cap their revenues but guarantee them a long-term income.
However, the generation industry has been split on which scheme they favour. Industry sources said generators have increasingly indicated that a one-off windfall tax would be preferable to the uncertainty of options linked to volatile energy prices.
“The suggestion has been that the options are simply too complex, and a straightforward windfall tax would give more certainty over the future for investors,” said one energy executive.
There are fears that a tax on renewable companies could deter investors from backing large-scale green energy projects.
The energy generator SSE has said a windfall tax could damage Britain’s progress on building up domestic sources of electricity.
Hunt is expected to present the toughened windfall tax in his autumn statement on Thursday. He is also likely to announce changes to the energy price guarantee, which caps a typical household bill at £2,500.
In one of his first acts as chancellor, Hunt shortened Truss’s two-year policy to cut energy bills to six months. He is expected to keep protection in place for millions of vulnerable low-income households and pensioners.
