Government legislates to cap low-carbon power revenues

The government is introducing legislation to cap the revenues low-carbon generators are making on the back of spiralling gas prices, while allowing them to keep a slice of their profits.

Ministers have announced that they are bringing forward an Energy Prices Bill that will include powers to impose a temporary “Cost-Plus Revenue Limit”, which is designed to sever the link between high global gas prices and the wholesale cost of low-carbon electricity.

The way the wholesale market currently works means that nuclear and renewables generators have benefited from the recent spike in electricity prices, even though their costs of production have not gone up significantly, because much more expensive gas tends to set the marginal price of power.

The bill will curb the amount low-carbon generators can make by limiting the revenue they can receive. The government has said that it plans to have the Cost-Plus Revenue Limit in place from the start of 2023.

The precise mechanics of the temporary limit will be subject to a consultation, which is due to be launched “shortly”, according to the government.

However, the government said the limit will allow generators to cover their costs and receive sufficient revenue to reflects their “operational output, investment commitment and risk profile”. They will continue to receive existing revenue support or subsidy payments such as Renewables Obligation Certificates (ROCs).

Another factor being taken into account when determining the limit is the “reasonable upper estimate” for pre-crisis expectations for wholesale prices.

The government is also considering allowing generators to keep a proportion of their revenue above the limit in order to incentivise the dispatch of power when the system needs it.

The limit is due to be set in advance of the policy taking effect but the government has warned that revenues received by generators will be considered at the end of a settlement period.

The government said the higher input costs of dispatchable low-carbon technologies, like biomass and nuclear, will be considered when the details of the limit are being designed.

The temporary revenue limit will apply in England, Northern Ireland and Wales. The government is liaising with the Scottish government to confirm whether it will apply in Scotland. The limit will be introduced on a temporary basis until the “abnormal” prices, which have been spurred by the war in Ukraine, abate.

The government also said it remains committed to the planned launch next year of the next allocation round of the Contracts for Difference (CfD) support scheme for the deployment of new generation.

The bill will additionally introduce powers to facilitate the recently introduced Energy Bill Relief Scheme for eligible non-domestic customers, including businesses, charities and public sector organisations, which took effect at the beginning of this month.

The legislation also brings forward powers to provide help with bills for off-grid customers and extend the £400 payments under the Energy Bills Support Scheme to customers in Northern Ireland and users of heat networks. The bill will require landlords to pass help with energy bills through to their tenants.

The move to introduce the new revenue limit follows the breakdown of talks between the government and low-carbon generators to switch projects enjoying legacy subsidies, like those on ROC contracts, onto cheaper CfDs.

Jacob Rees-Mogg, secretary of state for business and energy, said: “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.”

Reaction

RenewableUK chief executive Dan McGrail said: “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.”

He added: “Most wind generators sell their power a year or more in advance at prices that are a fraction of the record high market prices being set by gas. These hedging arrangements for wind power will help to keep electricity prices lower for consumers this winter, and the price cap must not undermine these arrangements.

“Industry has been proactive in proposing new fixed price contracts to cut costs and provide long-term, low-cost power for consumers. We welcome the inclusion of this proposal in the Bill, and it is vital that the scheme is developed rapidly so that industry can plan for new contracts and consumers can be confident that they are getting maximum benefit from cheap renewables.”

Energy UK’s director of advocacy Dhara Vyas welcomed the bill as a way of alleviating some of the immediate financial pressures facing customers and securing supply of energy.

However, she added: “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.”