Renewable power companies will have their revenues capped in England and Wales, after the government bowed to pressure to clamp down on runaway profits.
The announcement late on Tuesday night provoked immediate accusations that Downing Street had performed “another screeching U-turn” – having previously rejected calls to impose a windfall tax on power giants.
On the leadership trail, Liz Truss repeatedly resisted calls to cap huge profits being generated by power companies, after Boris Johnson’s government imposed a £5bn windfall tax on oil and gas companies in May, taking a slice of their profits.
The business department said it was stepping in with a temporary “cost-plus revenue limit” for renewable and nuclear electricity generators in England and Wales. This will curb the amount generators can make, “allowing generators to cover their costs, plus receive an appropriate revenue”, and will come into force at the start of next year.
The detail was contained in the government’s new energy prices bill, which limits power prices for households at an average of £2,500 a year and is estimated will cost taxpayers about £89bn. It has been estimated that taxing generators such as wind and solar farms could raise between £3bn and £4bn to help offset some of this cost.
Ed Miliband, the shadow climate and net zero secretary, said: “The government has finally accepted the principle of Labour’s call for a windfall tax on excess profits of electricity generators.
“After months of telling the country they were utterly opposed to the principle of a windfall tax, they have been dragged kicking and screaming to implement it.
“Yet again this shows Labour leading the agenda in British politics with another screeching U-turn from a government in office but not in power. But the government’s delay in acting will have cost billions and the public will pay the price.”
Truss ruled out a windfall tax on power generators when vying with Rishi Sunak to become prime minister, calling it “a Labour idea and all about bashing business and it sends the wrong message to international investors and to the public”.
She reinforced her stance when announcing her household bills package last month, saying: “I believe it is the wrong thing to be putting companies off investing in the UK.”
But after reversing plans to scrap the top rate of tax last week, Truss’s decision to limit profits at renewable power companies will be seen as another sign of weakness.
The government has been accused by institutions including the IMF of making the Bank of England’s cutting-inflation job harder. Mortgage rates soared, along with government borrowing costs, after chancellor Kwasi Kwarteng’s disastrous mini-budget last month.
An industry source said: “This is another U-turn as it’s 100% a windfall tax from the people that said they would never do one.” The business department argues that the measure differs from a windfall tax as it will be applied to excess revenues generators are receiving, rather than applying to all profits.
The Department for Business, Energy and Industrial Strategy (BEIS) said renewable power generators have been benefiting from “abnormally high prices” because of the link between soaring gas prices and wholesale electricity prices, since Russia’s winvasion of Ukraine.
“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,” it said.
The government said the limit would be a “temporary measure to deal with the exceptional market conditions driven by high global gas prices”.
The decision to impose a cap on revenues earned by renewable power companies such as wind and solar farm operators follows months of painful wrangling between the government and industry.
Ministers tried to encourage companies to voluntarily move on to contracts for difference (CfDs), that cap profits above a certain level, but without much success. BEIS said the revenue cap would remain in place until the markets returned to normal or generators moved on to other market arrangements, such as CfDs.
“It will ensure consumers pay a fair price for low-carbon energy and has the potential to save billions of pounds for British bill payers, while allowing generators to cover their costs, plus receive an appropriate revenue,” BEIS said.
Nevertheless, generators reacted with dismay. Keith Anderson, chief executive of ScottishPower, said: “We’re deeply worried at the suggestion renewables generators are making extraordinary profits when our power has been sold in advance at much lower pre-war prices – a fraction of today’s cost – protecting customers by hundreds of millions of pounds.
“It’s disappointing that such a significant market intervention by the government has come with so little detail, all this does is create uncertainty. This crisis has been caused by the cost of gas and it’s strange the proposed solution is to cap the price of low-carbon generation and to leave the gas sector untouched.”
A spokesperson for SSE said: “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 [per megawatt hour] cap being implemented by the EU. After all, the key lesson of the current energy crisis is the need to bolster our homegrown energy defences.
“It is also vital that the cap does not negatively impact on security of supply this winter, therefore flexible technologies, such as hydro, that require strong price signals to meet demand when most needed should be excluded.”
The announcement was light on details, but the government said it had been working closely with industry on the proposal, and would launch a consultation shortly. BEIS is liaising with the Scottish government to confirm whether the measure will extend to Scotland. The legislation also allows for a temporary revenue limit to apply in Northern Ireland.
In determining the limit, BEIS said it was taking into account the pre-crisis expectations for wholesale prices, and what a reasonable upper estimate for those might be. It intends to allow generators to keep a proportion of their revenue above the limit.
Britain has a diverse energy generation sector, including companies supplying power from gas- and coal-fired power plants, windfarms and nuclear power stations.
Centrica, ScottishPower and some others serve consumers directly, but many are focused on delivering power to retail suppliers. The biggest generators include SSE, E.ON, Ørsted and Drax, which runs a large eponymous power plant in North Yorkshire.
Nevertheless, the announcement implied Drax and nuclear power plants and other so-called baseload power providers would be given special treatment under the scheme, given “the importance of continued investment in these supplies”.
In May, the then chancellor, Rishi Sunak, announced what he called a “temporary, targeted energy profits levy” of 25% on oil and gas firms, but with a 90% tax relief for companies that invest in oil and gas extraction in the UK.
Jacob Rees-Mogg, the business and energy secretary, said: “We have been working with low-carbon generators to find a solution that will ensure consumers are not paying significantly more for electricity generated from renewables and nuclear.”
