Wind and solar farms across the UK will have to hand over close to half of their excess profits, the Government has announced, in a plan that the industry said could deter much-needed investment.
The windfall tax on renewables, biomass and nuclear power generators will be set at 45%, Chancellor Jeremy Hunt announced on Thursday. But gas and coal generators will be exempt.
Meanwhile the Government also upped the windfall tax on oil giants such as Shell and BP who drill in the North Sea from 25% to 35%.
The two taxes are significantly different. The oil and gas companies will be allowed to claim back most of their extra tax if they invest in the UK, but there is no way for the wind farms to claw back any of their windfall tax.
However, the 35% will be levied on all of the oil and gas companies’ North Sea profits, while wind farms and other renewables will only be charged 45% on anything above £75 per megawatt hour (MWh) of electricity they use.
“This windfall tax on low carbon power risks deterring investment, at a time when the Chancellor should be incentivising clean energy,” said Dan McGrail, the chief executive of trade body Renewable UK.
“Unlike in oil and gas, under this levy, companies which are making significant investments in renewables will get no tax relief and will be hit by a higher windfall rate.”
Mr Hunt hopes the taxes can raise around £14 billion for the Treasury between them next year.
“I have no objection to windfall taxes if they are genuinely about windfall profits caused by unexpected increases in energy prices,” he told the Commons on Thursday.
“But any such tax should be temporary, not deter investment and recognise the cyclical nature of many energy businesses.”
He added: “The structure of our energy market also creates windfall profits for low-carbon electricity generation.”
Many older wind farms and efficient gas-firing power plants have been benefiting from historically high energy prices.
Gas prices have soared around the world, and the price of electricity in Britain is largely decided by how expensive gas is.
Most new wind farms across the UK are built under so-called Contracts for Difference – which gives them a guaranteed price for each unit of electricity they produce.
But these generators are also forced to pay back anything more that they get above that guaranteed price – they have, therefore, not gained any windfall profits from recent price rises. These wind farms are not subject to the new windfall tax.
Also exempt from the windfall tax are gas power plants, and plants that burn oil and coal. The Government said that gas generators were paying more for the gas they burn.
However recent analysis from consultancy Cornwall Insight revealed a big difference between gas generators.
Some gas power plants are highly efficient, so burn less gas to create the same amount of electricity.
Cornwall said last month that it estimates that these highly efficient power plants could make around £10 billion in profits this winter.
“Any new tax should have focused on large, unexpected windfalls right across the energy sector, instead profits at fossil fuel plants are inexplicably exempted from the levy,” Mr McGrail said.
Mr Hunt told MPs: “Cheap, low carbon, reliable energy must sit at the heart of any modern economy.”
“But Putin’s weaponisation of international gas prices has helped drive up the cost of our national energy consumption.
“This year we will be spending an extra £150 billion on energy compared to pre-pandemic levels, equivalent to paying for an entire second NHS through our energy bills.”
He added: “Over the long-term, there is only one way to stop ourselves being at the mercy of international gas prices: energy independence combined with energy efficiency.
“Energy independence, so neither Putin or anyone else can use energy to blackmail us, and energy efficiency to reduce demand and climate impact as much as possible.”
Keith Anderson, ScottishPower chief executive, said: “In times of national crisis everyone should be playing their part. I’m deeply disappointed that renewables have been singled out – it seems it’s a recession made by gas, but a recovery to be paid for by renewables.
“Imposing this scheme to March 2028 creates a five-year-long corridor of uncertainty for investors – hitting the clean energy projects we need more of to wean us off gas dependency and decarbonise.
“I do not understand why renewables are being taxed at similar levels to oil and gas and those businesses are being given added incentives to invest in even more fossil fuels.”