Rachel Reeves has increased the pressure on renewable energy producers, increasing the windfall tax on wind and solar producers from 45 percent to 55 percent. The Chancellor stresses that this move will prevent the sector from “capital benefiting” from the recent oil and gas shock in the Middle East.
The increase in the electricity producer levy (EGL), announced on Tuesday, comes alongside a sweeping series of electricity market reforms from Energy Secretary Ed Miliband aimed at “breaking the link” between volatile gas prices and the cost of electricity paid by households and businesses.
For Britain’s small and medium-sized employers, still suffering from the scars of the 2022 energy crisis, the stakes could hardly be higher. But industry insiders were quick to label the package a “sham package” and warned that it risks tying consumers and businesses to higher bills for decades and weakening the investment climate for renewable energy, just as ministers try to prevent record capital inflows.
Under the existing system, many wind and solar farms continue to sell electricity on the wholesale market while receiving an additional subsidy through the old RO (Renewables Obligation) system. The Treasury’s new design offers a carrot alongside the stick: producers who voluntarily switch to fixed price contracts for difference (CfDs) will be exempt from the higher levy.
Ministers argue that this decouples renewable energy revenues from wholesale electricity prices, which are still set by the most expensive border asset in the system – almost invariably gas. Under current Merit Order pricing, even if most of the electricity comes from wind or solar, all generators receive the established gas price when a gas facility is used.
“Hard-working British families and businesses should not bear the brunt of global gas price shocks while power generators make exceptional profits,” Ms Reeves said. She added that switching generators to CfDs, combined with the 55 per cent levy, would “provide households and businesses with stronger protection against future energy shocks”.
But the numbers illustrate why voluntary switching could prove difficult. An RO certificate is currently worth £69.34. An onshore wind farm under the RO receives a certificate per megawatt hour (MWh) generated in addition to the wholesale price. As of 5pm on Monday, with wholesale prices at £99 per MWh, the total return was £168.43 per MWh. Offshore wind, which yields up to 1.9 allowances per MWh, could have saved up to £230.75 per MWh at the same time.
A senior energy industry source warned that issuing new 20-year CfDs to such generators on top of their existing RO entitlements would amount to a “double subsidy” and could increase consumer bills well beyond the planned RO phase-out from 2027 to 2037.
Dale Vince, the green energy entrepreneur and Labor donor, went a step further. “The government is not cutting the connection. I am very disappointed about that,” he said. “Something real needs to be done because we are in the second energy crisis of this decade.”
Kathryn Porter, the independent energy analyst, warned that the levy could also accelerate the decommissioning of Britain’s aging nuclear fleet, which falls within the scope of the windfall tax. “The whole thing is a mess. This whole plan could result in costs being offset at a higher level than they are now,” she said.
Tara Singh, chief executive of RenewableUK, struck a more diplomatic tone, saying the industry supported the weakening of the gas-electricity link and would work “constructively” with the authorities. However, she warned that investor confidence was at stake. “At a time when ministers are hoping to attract record investment in renewable energy, uncertainty over tax changes must be resolved immediately to avoid driving up the cost of investment.”
Ministers also signaled they would address the rising amounts paid to wind farms when they are switched off when grid capacity is limited. These costs are ultimately borne by bill payers, including the country’s 5.5 million SMEs.
For Mr Miliband, the broader message is political. “As we face the second fossil fuel shock in less than five years, the lesson for our country is clear,” he said. “The era of fossil fuel security is over, and the era of clean energy security must come of age.”
The government will now discuss the details of the market reform. For British business owners nervously looking at their energy bills, the question is no longer whether reform is needed, but whether Ms Reeves and Mr Miliband have found the right formula or simply swapped one distortion for another.
