Chancellor Targets Rising Household Energy Bills with Windfall Tax Increase
Rachel Reeves is set to increase the government’s windfall tax on low-carbon electricity generators as part of efforts to limit UK household energy bills, according to .
The chancellor intends to raise the levy, initially introduced in 2022, which targets excess profits earned by owners of older renewable energy and nuclear plants amid soaring electricity market prices following Russia’s full-scale invasion of Ukraine.
Plans to increase the so-called electricity generator levy could be announced as early as Tuesday, alongside a consultation on "radical" proposals aimed at permanently reforming the link between gas market prices and the cost of electricity in Britain.
Industry executives have been informed to expect contact from government officials on Monday, outlining the government's commitment to protecting electricity costs from gas market surges and to more frequently setting prices based on cheaper renewable sources.
Currently, the overall electricity price is determined by the most expensive source, typically gas-fired power plants. This pricing mechanism has caused electricity market prices to surge across Europe, particularly affecting countries reliant on gas.
Details of the Windfall Tax and Market Reforms
The proposed increase in the levy, which applies to nuclear, biomass, and renewable energy projects established before 2017, will generate additional Treasury revenue to help shield consumer energy bills in the short term. This will coincide with a government consultation on long-term reforms to the wholesale electricity market.
The government is also expected to seek input on plans to transition older low-carbon projects, currently subsidised under the renewables obligation scheme, to newer fixed-price contracts that guarantee electricity prices.
The industry was alerted after Reeves remarked at the IMF conference in Washington DC on Thursday that the government was considering "quite a big change" to weaken the current market structure, which she described as "absolutely the right thing to do."
"We are considering quite a big change to weaken the link between gas prices and electricity costs, and that is absolutely the right thing to do," Reeves said.
Following her comments, shares in SSE dropped over 6% on Friday, reaching their lowest level since the surge in global energy prices triggered by the war in Iran pushed the company's market value to an all-time high last week. Centrica, owner of British Gas, closed down 5%, and Drax fell 3%.
These companies have benefited from higher revenues due to sharp increases in energy market prices since the Iran conflict began seven weeks ago. Under the current electricity generator levy, generators face a 45% tax on electricity sold at market prices exceeding £75 per megawatt hour. The levy is scheduled to expire in March 2028.
Electricity market prices surged from approximately £74/MWh to over £100/MWh as the Middle East conflict escalated last month, with officials concerned that prices could rise further if disruptions continue into winter.
Proposals for Contract Changes and Market Stability
The government is reportedly considering requiring legacy low-carbon projects, such as nuclear plants and older wind and solar farms, to adopt the same contract arrangements as new projects, which involve fixed prices agreed with the government.
This proposal was initially suggested by analysts at the UK Energy Research Centre in April 2022 as a measure to protect UK electricity costs from rising gas prices. They estimated potential savings between £4 billion and £10 billion annually if market prices remain elevated.
A separate proposal by Adam Bell, a Stonehaven consultant and former head of strategy at the Department for Energy Security and Net Zero, involves removing certain plants from the market and holding them in strategic reserve. These plants would be activated as needed without distorting wholesale electricity costs.
"The plan, which could take £80 a year off energy bills, would be a transfer of value from producers to consumers to a degree we haven’t seen for 20 to 30 years," Bell said, adding it would help consumers benefit from the energy transition.
Sources told there is "consternation" regarding these plans, which could represent a fundamental reform of energy markets by weakening the link between gas prices and electricity costs amid increased risk and volatility.
The government declined to comment on the proposals.
