Investors in Britain’s renewable energy industry are urging ministers to provide urgent clarity over the level of the de facto windfall tax on low-carbon electricity generators that will come into force at the start of next year.
The UK government confirmed late on Tuesday that it would impose a limit on the revenues made by companies that produce power from technologies such as onshore wind, solar, nuclear and biomass. It said the measure would “raise billions of pounds” that would be used to offset the estimated £150bn cost of the energy support package for households and companies.
The decision to impose a windfall tax on generators that have been making extraordinary profits from soaring wholesale power prices came after ministers failed to secure a voluntary agreement with them to sign 15-year, fixed-price contracts.
But Tuesday’s announcement failed to fix a level for the cap, even though it comes into force in less than three months, instead promising it would be subject to consultation.
James Smith, fund manager for the London-listed Premier Miton Global Renewables Trust, said the market needed clarity fast.
“They need to come up with something sooner rather than later even if it’s a negotiation range so markets can have some level of insight into what is going on here,” Smith said. “What we don’t want is two months where no one really has the faintest idea what is actually happening.”
Investors in the UK renewables sector are also urging the government to set the cap at a level that is at least on a par with a similar one announced by the EU last month. Brussels has proposed the windfall tax would trigger above €180 per megawatt hour.
Richard Crawford, of InfraRed Capital Partners, the investment manager for the FTSE 250 The Renewables Infrastructure Group (TRIG), warned that given the turmoil in the gilt markets it was already a “challenging time” to invest in the UK.
“We are really asking the government not to do something that further destabilises the situation in the UK for renewables, especially at this time,” he said, as he called on the government to use the EU cap as a guide. “I really wouldn’t recommend the UK setting a cap at a lower level than that, making the UK less attractive as an investment destination,” Crawford added.
Tom Glover, UK chair of the German energy giant RWE, said price clarity and parity with the EU cap were needed. “If it [the UK cap] is materially below [the EU level] then . . . my group’s board is going to say: ‘Clearly the UK is less renewable friendly than these other markets.’”
UK government officials have said that, in calculating the level, they would take into account “pre-crisis expectations for wholesale prices, and what a reasonable upper estimate for what those might be”.
Matthew Hose, analyst at Jefferies, said that before Russia’s full-scale invasion of Ukraine, future wholesale price expectations averaged £100/MWh but at times were as high as £160/MWh.
The revenue cap will apply to all low-carbon generators, except those using newer technologies such as offshore wind that are on fixed-price “contracts for difference” agreements that were introduced in 2015.
The industry has labelled the intervention a “de facto windfall tax” and triggered accusations of another U-turn by Prime Minister Liz Truss, who insisted throughout her successful Conservative party leadership campaign that she was totally opposed to imposing such levies on the energy sector.
Ed Miliband, Labour’s shadow climate secretary, said the government had been “dragged kicking and screaming” into implementing a windfall tax after having repeatedly insisted they were opposed to one.
But Jacob Rees-Mogg, the business secretary, said the government’s political opponents were “mischaracterising” the substance of the intervention by calling it a windfall tax and misunderstanding the “technical subject”.