Renewable projects will be blocked from cashing in on the energy crisis, after the Government confirmed a raft of measures to ease record household bills.
Downing Street has announced a temporary ‘cost-plus revenue limit’, which will apply to renewable and nuclear electricity generators from next year.
The mechanism is intended to stop low carbon generators benefitting from abnormally high wholesale costs driven by spikes in gas prices, forcing up costs for consumers even though renewable energy is generally cheaper to produce.
The specifics of the measure are subject to the findings from an industry consultation, with the Government hoping to strike a balance between easing pressure facing households and allowing generators to “cover their costs, plus receive an appropriate revenue.”
As the mechanism will apply to excess revenues rather than profits, it is considered by the Government to be separate from the Energy Profits Levy – which targets the bumper earnings of North Sea oil and gas operators.
The measure has been foreshadowed for months, with former Chancellor Rishi Sunak previously calling for renewable generators to be included in the windfall tax while the Government has been in extensive talks over renewable obligation contracts and potentially uncoupling gas and renewable prices.
The latest intervention in the market is just one aspect of the ‘energy prices bill ‘which was unveiled tonight by the Government.
Alongside revenue caps, it features legislating powers for the Government to set up a voluntary ‘contracts for difference process’ for legacy generators benefitting from renewable obligation contracts.
The Government has also rolled in historic packages announced over the past few months to people amid an escalating energy crisis also feature in the bill.
This includes the household and business support packages, known as the ‘energy price guarantee’ and ‘energy bill relief scheme’ respectively, alternative fuel payments, and schemes designed to provide equivalent support in Northern Ireland and to ensure customers with heat networks or operating off-grid receive support.
Government bill confirms historic intervention
The overall costs of these measures has been estimated above £100bn – although the exact figures are dependent on wholesale prices over the coming months.
Cornwall Insight’s prediction for the household support package varies from £72-140bn depending on wholesale prices, while Investec’s forecast for the cost business support varies from £22-48bn.
Prior to the launch of the schemes, however, forecasters were predicting households could have to pay as much £6,500 next spring as part of the consumer price cap – raising the prospect of millions of Brits falling into fuel poverty.
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.
“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 United Kingdom into a nation that offers secure, affordable and fairly-priced home-grown energy for all.”
Industry body Energy UK welcomed the bill, which it believed would provide “much-needed support” to alleviate “immediate financial pressures millions of households and businesses are facing” from soaring energy costs.
Nevertheless, it raised concerns that capping renewable revenues could deter investment into the UK’s energy sector.
Dhara Vyas, director of advocacy, said: “We must be sure that the proposed mechanism does not risk the very investment the UK needs to ensure long term, sustainable economic growth.
“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.”