Renewables sector concerned that revenue cap ‘sends wrong message’ to investors
The UK Government is legislating to decouple renewable and nuclear electricity prices from wholesale gas prices – but will also temporarily cap profits for the renewables sector.
The changes are being brought into effect through a new Energy Prices Bill, which is being introduced in Parliament today (12 October) following consultations on electricity market reforms which began back in July.
One of the key measures under consultation was how best to de-couple global gas prices from electricity prices. Then-Prime Minister Boris Johnson spoke out in favour of change at lthe G7 Summit in Germany this June.
In the UK, wholesale electricity prices are informed by gas prices, partly due to the historic and present extent of gas-fired generation in the energy mix. It has been pointed out that this is not fair on domestic and business customers who purchase 100% renewable energy, which is likely to be cheaper. This unfairness will only become more pronounced in the future as unabated gas-fired electricity generation is phased out in the UK through to 2035.
The new Bill contains powers that will enable the UK to decouple wholesale electricity prices from wholesale gas prices, meaning that customers with renewable or nuclear energy contracts will stand to save money on their bills.
The Bill also contains a new ‘Cost-Plus Revenue Limit’ that will be imposed on low-carbon electricity generators. The Government’s argument is that, because wholesale electricity prices have been tied to gas prices – regardless of whether generation was gas-free – low-carbon generators have been reaping excessive profits this year.
A consultation on the new limit will be launched shortly. Should the Bill progress as planned, the limit would come into force from the start of January 2023 in England, Northern Ireland and Wales. BEIS has stated that the limit will be “temporary” and will not stop generators from covering their costs.
BEIS Secretary Jacob Rees-Mogg said: “We have been working with low-carbon generators to find a solution that will ensure consumers are not paying significantly more for electricity generated from renewables and nuclear.
“That is why we have stepped in today with exceptional powers that will not only ensure vital support reaches households and businesses this winter but will transform the UK into a nation that offers secure, affordable and fairly-priced home-grown energy for all.”
Elsewhere, the Bill will enshrine in law the Government’s promises to guarantee domestic, dual-fuel energy bills for two years from this month, and to subsidise business energy costs for at least six months.
It also touts the creation of an Alternative Dispute Resolution body to handle complaints raised by customers that are connected to heat networks.
Green economy reaction
Given that Liz Truss’s Government has been staunchly opposed to a windfall tax on fossil fuel extraction and power generation, some key bodies and figures in the UK’s renewables sector have questioned whether the Cost-Plus Revenue Limit for clean power generators only sends the right message.
“We are concerned that a price cap will send the wrong signal to investors in renewable energy in the UK,” said RenewableUK’s chief executive Dan McGrail.
“A price cap acting as a 100% windfall tax on renewables’ revenue above a certain level, while excess oil and gas profits are taxed at 25%, risks skewing investment towards the fossil fuels that have caused this energy crisis.”
“We must be sure that the proposed mechanism does not risk the very investment the UK needs to ensure long term, sustainable economic growth,” added Energy UK’s director of advocacy Dhara Vyas.
“We look forward to continuing to work with government to ensure that any new mechanism is introduced in a way that encourages investment in low carbon generation, rather than deterring it. This, alongside improved energy efficiency, will reduce our reliance on volatile gas prices in the long-term, as well as boost our economy.”
Regen’s chief executive Merlin Hyman said:” Announcing outline plans for a ‘Cost-Plus Revenue Limit’ windfall tax on revenues of renewables and nuclear, with few details of the price or scope, risks damaging investor confidence and the function of the market.
“Over the past 24 hours, we have received calls from developers and investors who are trying to figure out what the government policy actually is, at a time when we urgently need hundreds of billions of pounds invested in new renewables and storage. The proposals so far look like a worse deal than the windfall tax imposed on oil and gas companies, effectively taxing renewables to prop up investment in fossil fuels. It is vital that the government gets the detailed design of this measure right.”
The most recent Renewable Energy Country Attractiveness Index (RECAI) from EY ranked the UK as the world’s third most attractive clean energy investment market, behind only China and the US.