Rachel Reeves has stepped up pressure on renewable generators, raising tax on wind and solar producers from 45 per cent to 55 per cent, a move the Chancellor insists will stop the sector from “cashing in” on the recent oil and gas shock in the Middle East.
The rise in electricity generation tax (EGL), announced on Tuesday, is timed to sit alongside a shocking set of electricity market reforms from Ed Miliband, the Energy Secretary, designed to “break the link” between volatile gas prices and the electricity costs paid by households and businesses.
For Britain’s small and medium-sized employers, who are still nursing the scars of the 2022 energy crisis, these figures could be higher. Industry figures, however, have been quick to call the package a “fraud”, warning that it risks locking consumers and businesses into high debt for decades and chilling the investment climate for recovery as ministers try to record revenue.
Under the current system, many wind and solar farms still sell power to the wholesale market while receiving additional funding through the legacy renewables obligation (RO) program. The Treasury’s new proposal offers a carrot next to a stick: generators who voluntarily switch to fixed-price contracts for difference (CfDs) will be exempted from the higher fee.
Ministers argue that this will erode renewable income from retail electricity prices, which are still set by the most expensive industry in the system – almost always gas. Under the current order of merit pricing, even if most of the power comes from wind or solar, all generators are paid a fixed price whenever the gas plant is called upon.
“Hard-working British families and businesses should not have to bear the brunt of a global gas price shock while electricity producers make extraordinary profits,” Ms Reeves said. He added that moving generators to CfDs, combined with a 55 percent tax, would “give households and businesses strong protection against future energy shocks”.
But the numbers reveal why voluntary switching can prove a tough sell. An RO certificate currently costs £69.34. An offshore wind farm under RO receives one certificate per megawatt hour (MWh) produced, on top of the wholesale price. At 5pm on Monday, wholesale prices were £99 per MWh, producing a total return of £168.43 per MWh. Onshore wind, which receives certificates of up to 1.9 MWh each, could bank as much as £230.75 per MWh over the same period.
One energy industry source warned that giving such generators new 20-year CfDs on top of their existing RO entitlements amounted to “double subsidy”, and could keep consumer debt much higher over the planned 2027-2037 RO phase-out.
Dale Vince, a green energy entrepreneur and Labor donor, has stepped forward. “The government is not breaking the link. I am very disappointed about that,” he said. “There is something real that needs to be done because we are in the second energy crisis of the decade.”
Kathryn Porter, an independent energy analyst, warned that the tax could also accelerate the retirement of Britain’s aging nuclear fleet, which falls under the tax threshold. “This whole thing is a mess. This whole program may end up reducing the cost to a higher level than it is now,” he said.
Tara Singh, chief executive of RenewableUK, commented further, saying the industry supports weakening the gas-electricity link and will “work constructively” with officials. But he warned that investor confidence was on the line. “At a time when ministers are hoping to attract record levels of investment in renewables, uncertainty over tax changes must be clarified quickly so as not to increase the cost of investment.”
Ministers also signaled they would tackle rising figures paid to wind farms to switch off when grid capacity is reduced, a cost borne by ratepayers, including the nation’s 5.5 million SMEs.
For Mr Miliband, the broader message is political. “Since we are facing the second 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 consult on the details of the market reform. For British business owners looking at their energy bills with nervous eyes, the question is no longer whether reform is necessary, but whether Ms Reeves and Mr Miliband have hit on the right formula, or are they just swapping out more distortions.
