Weekend press round-up: Generators express concerns over windfall tax

In the latest round-up of the weekend papers, generators express concerns over the government’s plans to levy a windfall tax on energy companies, ministers are reported to be considering financial aid for steelmakers struggling with rising energy prices and Octopus Energy partners with a house builder to offer energy self-sufficient homes with no annual bills.

After windfall tax U-turn, Sunak sets his sights on another cash cow

Mick Farr has a question ready for Treasury officials when he meets them this week amid the looming threat of windfall taxes on his industry.

“Will someone please explain to me how we are making windfall profits?” asks the chief executive of Triton Power, owner of three gas-fired power stations, as he eyes fuel costs expected to triple this year to $900m (£720m).

Industry executives are pushing back as Rishi Sunak explores a raid on profits among electricity generators to try and offset soaring energy bills, having hiked taxes on North Sea oil and gas producers from 40pc to 65pc last month.

Billions of pounds have been wiped off the stock market value of major generators such as Drax and SSE since The Financial Times reported late last month that the Chancellor was considering trying to raise £10bn by hiking taxes on the sector, while also working on wider market reforms.

It comes at a delicate moment for the sector, with the Government also trying to stimulate billions of pounds worth of investment into clean energy, and convince generators to stay open to help keep the lights on this winter as Russia’s war on Ukraine rocks energy markets.

Developers are now queuing up to warn Sunak the plans could deter investment and convince him that the scale of any profits has been wildly overestimated. Analysts warn of legal challenges if the policy is badly designed. Kwasi Kwarteng, the business secretary, is believed to be unenthusiastic, wary of the investment risk.

Experts question how the market has been allowed to reach this point. “A windfall tax is an admission of failure,” says Sir Dieter Helm, who published a review for the Government into the cost of energy in 2017.

“You wouldn’t need windfall taxes if you had the proper tax regime for the North Sea and you had a proper electricity market system which priced on the basis of costs.”

The prospect of a windfall tax on the electricity sector follows months of high wholesale electricity prices, which helped trigger a 54pc rise in energy bills in April and the biggest cost of living squeeze in a generation. Bills are set to rise again in October, potentially as high as £2,800.

High electricity prices are largely due to the high costs of gas, which started climbing last September due to global shortages, worsened by the war in Ukraine. Gas is used to generate almost 40pc of electricity but also effectively sets prices across the rest of the market, as the marginal source.

This creates the opportunity for huge profits among non gas-fired generators who don’t have to pay for gas to run their plants, but can, in theory, sell electricity at prices as if they did.

Wind farms built before the current subsidy regime, under which they get a fixed price of electricity, may be benefiting from this effect in particular, unless they sold forward their power at a fixed price in any case.

Cornwall Insight, electricity market analysts, said that about 19GW of current wind capacity in Britain was built before the current subsidy regime, meaning they may be particularly benefiting from high wholesale prices, compared to about 4.9GW under the new subsidy regime.

However, both gas-fired and other flexible generators have also been able to fetch particularly high prices amid tight electricity supplies in recent months due to factors including low nuclear output in both Britain and the continent, occasional low wind, and some gas plants having closed.

National Grid opened a review in November into high costs in the balancing market, where generators are paid through a levy on consumer bills to provide back-up supply when needed. Analysts believe some jump out of the commercial market during the day to sell power at higher prices in the balancing market.

Analysts at JP Morgan say gas-fired generators “arguably are benefiting from a larger than expected clean spark spread [the difference between costs of gas and electricity prices].”

Profits at FTSE 100 energy giant SSE’s gas-fired power plants division climbed 91pc to £306.3m in the year through March, which it put down to better spark spread and “strong performance in the balancing market”. Directors of two mothballed power plants have been trying to reopen them amid estimates the plants could have made almost £100m in profits during the first quarter of this year.

The Telegraph

Energy subsidy lined up for struggling steelmakers

The Business Secretary is “actively considering” emergency aid for steelmakers and other heavy industry users as they struggle with a steep hike in their energy bills.

Kwasi Kwarteng is examining proposals to soften the blow of a shake-up of bills that threatens to increase network charges for heavy industrial users by up to 85pc.

British steelmakers will be saddled with the extra costs due to a new charging regime that will significantly reduce incentives for using the electricity network at off-peak times.

Ofgem is pushing ahead with plans to strip out incentives to even out the charges it levies on industrial and domestic users.

But steelmakers have warned the changes could result in network charges jumping from £9.50 per MwH to £17.50 per MwH. By contrast, steelmakers in France and Germany face network charges of just 50p and £1 per MWH respectively.

Frank Aaskov, energy policy manager at industry body UK Steel, said the plans could further dent the competitiveness of Britain’s steel industry.

He said: “If you have charges and costs of operating the only way to deal with those costs is to have a lower profit or a lower margin on your steel.

“Obviously that means it becomes much more difficult to attract investment from these multinational companies.”

Steelmakers warned last year that plants could be forced to shut down because of unmanageable energy costs. A source said the Business Department is now “actively considering” plans to subsidise network charges for energy users by up to 90pc. The cost for the charges would then be spread among other users on the network.

The German government currently provides a 90pc exemption to all elements of network charging. A similar measure in Britain would reduce prices for steel producers by £9 per MwH.

A source close to the discussions said “the message on this is being heard” on costs owing to a renewed push in Whitehall to secure energy supplies for domestic and industry consumers.

But it is thought the changes would likely not be implemented until 2024 because of the complexities of such a scheme.

One industry source warned Ofgem’s overhaul of network charges could undermine the Government’s push for a low-carbon economy and might trigger blackouts if several high-energy users started using the power grid at peak times.

The source said: “These changes will see a massive overhaul of how we charge for electricity. Domestic and micro businesses will no longer be subsiding those who currently get the benefit of using electricity at off-peak times.

“But if there’s suddenly a huge spike in demand at peak periods there will be higher prices from the system having to manage the stress and buy power quickly at prices they can’t control.

“There’s a potential for blackouts for sure. If there’s some heavy industry that suddenly wants 10 MW at the same time as some others then the system could end up short.”

Steelmakers have argued that reducing benefits for operating at non-peak times will have a severe impact on operations just as the industry shifts towards using more electricity.

Mr Aaskov said: “If you look over the next thirty years we are getting a clear policy signal from Whitehall to stakeholders in the steel industry that they need to decarbonise. The way to do that is to electrify your operations, capture emissions or switch to hydrogen.

“All of those options require significantly more electricity consumption on site and so for the sector it is a doubling or tripling of consumption. And if you have electricity prices going up compared to competitors then it’s incredibly difficult to attract investment into the UK because it’s so much more efficient to invest into plants in Germany and France.”

The Telegraph

Octopus and Ilke launch clean energy scheme with no bills for householders

UK power supplier Octopus Energy has joined forces with housebuilder Ilke Homes to develop a renewable scheme that aims to guarantee home buyers no energy bills.

The joint project between Octopus and Ilke, which builds prefab homes in factories, is designed to wean the country off fossil fuels in what the companies say is a first for the UK market.

Octopus chief executive Greg Jackson said the renewable scheme could transform the UK energy market, just as families struggle with soaring energy costs.

However, the initiative means buyers will have to pay an extra £8,000-£9,000 when they buy their house, said Giles Carter, Ilke’s chief executive. This is the cost of adding solar panels, battery storage and air source heat pumps to the homes to make them energy self-sufficient.

The companies are piloting the project with a pair of two-bedroom, semi-detached family homes in Essex. They have plans to expand the scheme to more than 10,000 homes by 2030.

Octopus has pledged that homeowners will pay no bills unless they use more than 10MWh of energy, which Jackson estimates is treble the standard annual usage of a household. Any excess energy generated can be fed back to the grid.

“We think [the homes] could be self-sufficient forever. That’s a blueprint. Sooner or later, you start to be able to transform an energy system when you are doing that,” said Jackson.

The partnership aims to demonstrate that “a sustainable future doesn’t mean being cold and having to wear hemp. It’s about living in homes which are as high quality as you would expect elsewhere”.

If the solar panels fail to generate enough energy, the homes are still connected to the grid and can draw energy without it affecting their bills, added Jackson.

Octopus’ guarantee of zero bills is made for a 12-month period rather than in perpetuity, though Jackson and Ilke’s Carter say they expect to roll on the zero tariff indefinitely.

With annual household energy bills rising and expected to reach as high as £2,800 later this year, Carter argues that home buyers would quickly make their money back.

He expects green technology building costs to reduce over the decade. “By 2030, we hope there is zero incremental cost,” he said.

The Financial Times

Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House.