Rishi Sunak is cooling on the idea of a windfall tax on electricity generators, with the UK chancellor increasingly likely to use broader reforms to electricity markets to prevent excess profits in the industry, senior government figures have said.
The chancellor announced in May that the Treasury was examining “appropriate steps” to ensure that the electricity generation sector contributed to a £15bn support package for households hit with rising bills.
Officials had briefed that electricity companies could be hit with a windfall tax — similar to one already imposed on UK oil and gas producers — that would raise £3bn-£4bn.
One minister told the Financial Times that the government was increasingly worried about the “perverse consequences” of applying a windfall tax.
“A lot of companies are telling us they’ll cut investment if we go ahead with the tax,” he said. Another senior figure said that Downing Street had pushed back against the proposal that it first announced a month ago.
Billions of pounds have been wiped off the value of London-listed electricity companies since the FT first revealed Sunak’s plans for a windfall tax on the sector.
But since then officials have privately signalled to the industry that the plan was proving to be too complicated to instigate.
The electricity sector is diverse, ranging from gas-fired power to offshore wind farms, and generators sell their output under a multitude of different contracts. Many have argued that they often sell their electricity far in advance so have not benefited from current high market prices.
Some of the biggest electricity companies, including the UK’s SSE and RWE of Germany, have pushed back against a windfall tax. They have warned that it would deter investment in clean energy technologies, which the government is relying on to increase the country’s domestic energy supplies following Russia’s invasion of Ukraine and to reach longer-term climate goals.
Sunak said he wanted to tax the excess profits generated by the industry because companies producing nuclear or wind energy were receiving windfall profits due to the price of electricity being closely linked to gas, which has soared in recent months.
The government had already signalled in April that it wanted to carry out “comprehensive” reforms of the electricity market, which would decouple electricity prices from those of gas.
Now there is a growing belief in government that those reforms could be another way to tax excess profits in the industry without some of the downsides of a straightforward windfall tax, although they could take much longer to implement.
Business secretary Kwasi Kwarteng said on Tuesday the fact that the price of electricity was directly related to the marginal cost of gas made sense 40 years ago when most electricity came from coal and gas.
“In the 2020s . . . we have a huge diversity of sources of power. So the price you’re paying doesn’t reflect — if it’s being priced off the marginal cost of gas — it doesn’t reflect the cost of generation,” he told the House of Commons business, energy and industrial strategy select committee.
Kwarteng said officials were “trying to work at pace” on the electricity market reforms and were looking at two alternative approaches.
One was a “bifurcated” market through which renewables would be priced differently to gas-fired power stations. Another alternative would be to look at the average cost of generation across different technologies, he told MPs.
“It cannot be the case that we can forever link directly our electricity prices to gas prices when gas is only a portion of the electricity generating mix,” he added.
Oil and gas operators lambasted Sunak in Aberdeen last week after he raised taxes on their profits from 40 per cent to 65 per cent.
Trade body Offshore Energies UK wrote to the chancellor on Tuesday warning that some banks had reduced oil and gas operators’ borrowing capacity by 15 to 20 per cent in response to Sunak’s so-called energy profits levy, which was “acutely impacting companies that rely on debt capacity to fund and grow their business”.
The Treasury did not immediately respond to a request for comment.