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Posted 1 year ago | 6 minute read

Government seeks to cap revenues for renewable energy 

UK government has introduced its landmark Energy Prices Bill to parliament, putting into law a number of the already-announced mechanisms that will be used to support households and businesses this winter including the Energy Price Guarantee and the Energy Bill Relief Scheme.

Currently in the UK market, wholesale electricity prices are set by the most expensive form of generation – presently gas-fired generation, which are significantly higher in light of Russia’s invasion of Ukraine. As a result, low-carbon electricity generators are benefiting from higher prices even though they often cost less to produce, while consumers are paying more for energy generated from renewables and nuclear.

Cap and CfD

Among other measures, the Energy Prices Bill, which received its first reading in the House of Commons on 12 October, aims to sever the link between high global gas prices and the cost of low-carbon electricity. This will be done through the introduction of a new temporary Cost-Plus Revenue Limit in England and Wales, which will implement a revenue limit, curbing the amount low-carbon generators can make.

The precise mechanics of the temporary Cost-Plus Revenue Limit will be subject to a consultation to be launched shortly ahead of it coming into force from the start of 2023. The full scope of coverage is still being determined, but this will apply to low-carbon generating assets not currently covered by a Contract for Difference. The limit will allow generators to cover their costs and receive an “appropriate revenue” that reflects their operational output, investment commitment and risk profile.

The government is working through the detail of the appropriate price for the ‘Cost-Plus Revenue Limit’ but one relevant factor being considered is the pre-crisis expectations for wholesale prices, and what a reasonable upper estimate for what those might be. Renewable generators will continue to be able to receive existing subsidy support payments such as Renewable Obligation Certificates on top of this.

Business and Energy Secretary, Jacob Rees-Mogg, said:

“Businesses and consumers across the UK should pay a fair price for energy. With prices spiralling as a result of Putin’s abhorrent invasion of Ukraine, the government is taking swift and decisive action. 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.”

The government has said it does not consider this intervention to be a windfall tax noting that it will be applied to excess revenues, as opposed to applying to all profits. A costs plus revenues model would also allow fuelled generators such as biomass to take account of cost of fuel if they were within scope of the scheme.

While the details will be subject to industry consultation (expected shortly), the government maintains that any cap will be temporary and is intending to run a voluntary Contracts for Difference process for existing renewable generators in 2023, in-line with the commitments from Prime Minister Liz Truss.

The UK policy comes weeks after the European Union imposed a similar policy. In September, the EU imposed a price cap on low carbon energy producers. Any “excess profits” generated above €180/MWh.

Industry response

But the measures outlined have been described by the industry as a “de facto windfall tax”.

The Association for Renewable Energy and Clean Technology (REA) said that this policy risks undermining investment and certainty at a time when renewable energy and clean technology investment in crucial to achieving Net Zero.

REA Chief Executive Nina Skorupska said:

“We know that the current energy crisis has led to previously unthinkable measures in the market, and that every sector needs to play its part – however, this policy risks undermining investment and certainty at just the time when record investment is needed to get us to net zero.

“Much will depend on the final price set and which projects fall within the scope. We are also adamant that fuelled generators should have a different price set based on their circumstances and that any cap must take into account the significant inflation in costs of the past six months.”

RenewableUK’s CEO Dan McGrail commented:

“We are concerned that a price cap will send the wrong signal to investors in renewable energy in the UK. 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 can already see the investor turmoil that the EU’s proposed price cap is causing in the European market […] to limit the negative impacts, it is essential that a cap is set at a level that doesn’t make the UK less attractive to investors than the EU, is technology neutral and has a clear sunset clause in place”.

Solar Energy UK chief executive Chris Hewett commented:

“The UK solar industry is concerned that a windfall tax on revenue from existing renewable generators has been announced in haste, while many of the details are still to be worked out, particularly for small generators who have been excluded from ministerial discussions so far.

“This gives another very poor signal to international investors in renewables in the UK, on the back of speculation of restrictive planning rules for solar farms being pursued by Defra.

GridBeyond’s viewpoint

GridBeyond Asset Development Director Chris Smith said:

“This announcement is a significant change of direction from a government that had previously been against any form of windfall tax and it comes at a time when policy and regulation need to be aligned.

“The Committee on Climate Change has noted that net zero investment needs to grow to £50-60B a year by 2030, nearly double the current figure of £30B a year. If there is an investment hiatus as investors take stock of high-level market intervention this investment gap will only grow.

“Building and investing in new low-carbon generation is a critical building block to reducing dependency on gas. But there is a possibility that there will be a risk premium on investments after these interventions.

“While the Cost-Plus-Revenue Limit looks like it is intended to be temporary, there are still many uncertainties and imposing such an enforced cap on revenues is very much an untested mechanism that has potential to increase the cost of the energy transition overall.”

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