Renewable energy: Government plan for price cap is risky, firms warnon October 8, 2022 at 10:21 am

The government is set to cap the price of electricity from older renewable and nuclear facilities as early as this week, the BBC understands.

The plans could hit the profits of energy companies including SSE, Scottish Power, RWE and EDF Energy.

Firms are concerned that further price limits could upset the UK’s reputation for a stable regulatory environment and deter future investment.

Currently, electricity older facilities produce is linked to the price of gas.

This is different from newer facilities, which produce power at an agreed price.

In years gone by, electricity produced by gas had been the cheapest – but this is no longer the case.

In fact, those nuclear and renewable producers are making very significant excess profits because the price of gas has rocketed, but their costs of production have not.

These profits have prompted calls for a windfall tax on them.

This was looked at by the Treasury under former Chancellor Rishi Sunak, but was ultimately rejected as it was very complex and energy producers argued it sent a perverse message about investment in renewables.

Also, the problem with a windfall tax is that while it addresses the profit, the price doesn’t come down.

If you cap the price – then profits, prices and therefore inflation comes down. The latter is a key attraction to the government, which has £500bn of debt.

The electricity producers are lobbying hard against this and warn that an intervention like this has several risks.

Firstly, it will reduce the incentive for energy retailers to buy in advance – creating a less predictable, more volatile market.

Secondly, they have already sold most of what they expect to produce this year and next.

Any government haste to tinker with contracts already signed could cause market disruptions at a time when the volatile economic weather can magnify see market dislocations into major crises, energy firms said.

Some energy bosses said they would actually prefer a windfall tax – with one mentioning he would be happy to pay tax at 25% rather than the current 19% and pointed out that the oil and gas companies are able to reduce their tax burden by 91% for every pound they invested.

One said that it “would be perverse to impose higher effective taxes on renewables than on oil and gas companies.”

The electricity producers are trying to protect their profits but the government is equally determined to find a way to lower bills and inflation.

If it does cause market chaos and deters future investment, the industry will say the government has been warned.