Windfall tax on generators risks supplier failures

Extending the government’s windfall tax to electricity generators risks pushing more suppliers into collapse, Energy UK has warned.

In a paper published on Wednesday (8 June), the trade body outlined the expected impact on the industry of chancellor Rishi Sunak’s threat to impose his recently announced energy profits levy on generators.

Energy UK said extending the tax to generators would “jeopardise” the accomplishment of the government’s 2050 net zero emissions target, lowering the “pace and scale” of investment in the low-carbon infrastructure needed to reduce the country’s exposure to the “expensive and volatile” international gas prices at the root of soaring energy bills.

The paper pointed to the Climate Change Committee’s estimate that to meet the goal, low-carbon investment will have to increase from around £10 billion annually in 2020 to around £50 billion per year by 2030 and then continue at this level through to 2050.

A windfall tax on generators would also increase the risk of collapse of those suppliers, which use profits from generation to cross-subsidise their retail activities, Energy UK warned: “Some integrated power businesses have been able to offsets losses from their retail operations through modest profits from generation. This would lead to higher household energy bills.”

Extending the levy would also increase generators’ cost of investment, which would then be passed on to consumers, for example, through higher Contracts for Difference bids, the paper said: “It would lead major developers to question the return on their investment at the exact moment that the UK requires significant volumes of capital to flow in the direction of clean energy generation.

“A windfall tax on generators could delay and increase the cost of these investments, at a time in which the UK needs to dramatically improve security of supply and rapidly expand the UK’s low carbon infrastructure to provide clean, cheap, and domestically sourced electricity.”

The Energy UK paper was published ahead of the first hearing of the House of Commons Environmental Audit Committee’s inquiry into energy security and accelerating the transition away from fossil fuels.

Speaking at the hearing, Paul Spence, director of strategy and regulation at EDF Energy, said soaring energy prices are already having an impact on poorer customers’ behaviour. Those on pre-payment meters are topping up with smaller amounts than the £5 or £10 sums they normally use.

In line with calls from the CBI, Eon UK chief executive Michael Lewis appealed to the government to push through legislation for the ECO4 energy efficiency scheme before Parliament’s summer recess begins next month.

Pointing out that the mandate for the scheme’s existing third round runs out this month, he said: “As long as legislation is passed by then (July), it will be ok but there will definitely be a hiatus if it’s not passed by the summer recess. We need it as soon as possible.”