UK intends to cap revenue from renewable electricity generators

The UK government is moving forward with plans to cap the revenue renewable electricity producers are making from skyrocketing wholesale electricity prices following the Russian invasion of Ukraine.

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

Renewable power generation companies that may be affected include EDF Energy, RWE, ScottishPower and SSE.

The government had hoped to persuade power producers to voluntarily enter into 15-year fixed price contracts well below current wholesale prices for their output.

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

As UK households grapple with soaring energy bills, the government told generators at a private meeting last week it would aim for a cap, people with knowledge of the discussions said.

People briefed on the meeting last week said prices of around £50-60 per megawatt-hour were cited as the starting point for the cap, well below current prices of around £490/MWh, although no final decisions have been made became.

Ministers were alarmed by the profits of some power producers, who are still benefiting from a government subsidy program that dates back to 2002 when the renewable energy industry was in its infancy.

The government has examined potential revenue cap heights based on evidence such as wholesale prices prior to the energy crisis.

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

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

Power producers fear the UK government’s plans will do more damage to the sector than a 25 percent windfall tax imposed on oil and gas companies by then-Chancellor Rishi Sunak in May.

His 25 per cent “energy profits levy” has been accompanied by a new investment allowance that energy companies can use to offset their tax bills as they pursue projects to boost Britain’s fossil fuel production.

“The main issue isn’t that the government imposes some form of windfall tax,” said an industry official who attended last week’s meeting between the government and power producers.

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

The Government is committed to the UK achieving net-zero carbon emissions by 2050.

Another industry representative briefed on the talks between ministers and generators said: “You are discouraging technology that you can build quickly to bring it down [energy] Bills.”

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

Government efforts to persuade power producers to voluntarily enter into 15-year fixed-price contracts have been complicated by the fact that ministers wanted deals that could have an impact this winter and most companies had already agreed to increase their expected output well into the future to sell ahead.

The government announced last month that UK household energy bills will be capped at an average of £2,500 a year for the next two years.