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Windfall tax will have ‘perverse’ impact on solar power

Solar Energy UK
18 November 2022 

The Windfall Tax imposed by the Autumn Statement could slow investment in renewable energy while leaving profits from the most carbon-intensive generators unaffected.

In his speech yesterday, Chancellor Jeremy Hunt said, “Now would be the wrong time to step back from our international climate responsibilities,” a position at odds with the tax. It will not apply at all to Britain’s coal-fired and gas-fired power stations, while a lower rate of 35% will apply to oil and gas producers, which still have the ability to offset the tax bill with new investment. This investment incentive is not available for renewable generators – a terrible signal to low-carbon investors.

To meet government objectives of decarbonising the power supply and bolster energy security, billions of pounds of investment is required for renewable generation. As Hunt said, “Since 2010, our renewable energy production has grown faster than any other large country in Europe. But we need to go even further, with a major acceleration of home-grown technologies… to deliver new jobs, industries and export opportunities, and secure the clean, affordable energy we need to power our future economy and reach net zero.”

The imposition of a 45% charge on what the government calls ‘exceptional generation profits’ will do nothing to improve investors’ confidence.

Overall taxation is much higher, as it will not be deductible from profits subject to Corporation Tax. The effective rate is, therefore, 70%. The comparable EU revenue cap mechanism is deductible in this way.

The Windfall Tax, formally called the Electricity Generator Levy, which will be limited to corporate groups supplying more than 100 gigawatt-hours per year, will begin in January. The threshold means owners with generating capacities of around 100MW or more will be affected, so that smaller portfolios will be excluded. A £10m annual allowance applies before it is charged.

It will apply to prices above £75 per megawatt-hour. This is below prior expectations, so the potential harm to the sector will be greater than anticipated. It is set to last for an excessively long period of five years.

The position of assets supported by the legacy Feed-in Tariff regime remains ambiguous, as the guidance on the tax fails to mention them. This is also the case for installations subject to power purchase agreements, struck far before electricity prices began to surge.

The solar industry is urgently seeking clarification on whether or not the tax will apply to them. Power generated under the Contracts for Difference (CfD) mechanism is explicitly excluded.

The combination of factors means that so-called merchant installations, unshielded from changes in electricity prices through CfDs, will be most affected by the new regime. Perversely, these unsubsidised installations, which demonstrate just how cost-competitive renewable technologies can now be, will be disproportionately penalised by the tax.

If the government is willing to step in during periods of high prices and take a slice of revenues, project risks increase significantly, potentially making CfDs the only investable route – the opposite of what the ongoing Review of Electricity Market Arrangements is trying to achieve.

However, the Autumn Statement may offer some benefits for the solar sector. Hunt’s promise to double investment in energy efficiency to over £12bn per year, though only from 2025, accords with harnessing solar thermal technology and employing rooftop photovoltaic panels to power heat pumps or other electric heating kits. Solar Energy UK also looks forward to receiving further information on the planned ‘Energy Efficiency Taskforce’.

“The energy price crisis has been caused by the UK’s historical reliance on gas, which has backfired, causing enormous damage to the economy. A swifter move to decarbonised energy would have avoided the dire consequences we are seeing now,” said Chris Hewett, Chief Executive of Solar Energy UK.

“So the Chancellor should be taking every opportunity to encourage investment in clean energy. Yet there will be no tax relief for companies investing in meeting the government’s target of 70GW of solar capacity by 2035 – unlike investments in oil and gas production, which will be taxed less than fossil-free generators.

“The Government is tilting the playing field against renewables investment whilst telling world in COP27 we want to be a clean energy superpower. The policy simply has to match the rhetoric – Hunt must back the renewable energy sector’s plan to reform the electricity market, based on expanding the highly successful CfD system to legacy assets,” Hewett continued.

In conclusion, the Windfall Tax must clearly be subject to formal consultation and the Government must listen to the legitimate concerns of those who will be subject to it.

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Editors’ notes: 
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Gareth Simkins, Senior Communications Adviser | |