UK Government confirms windfall tax hike on low-carbon electricity generators

Rachel Reeves will hike the UK Government’s windfall tax on low-carbon electricity generators as part of efforts to tackle rising energy bills.

The Chancellor will increase the so-called electricity generator levy from 45% to 55% to raise Treasury funds to support consumers and businesses with the rising costs in the short term.

The tax was introduced in 2022 to target the excess profits being made by nuclear, biomass and renewable energy projects built before 2017 as electricity prices soared after Russia’s invasion of Ukraine.

The Government is also proposing a voluntary move by these “legacy” clean power generators, which supply around a third of Britain’s power, on to fixed-price contracts to help protect consumers from volatile prices.

These will be offered only where they deliver clear value for money for consumers, ministers said.

It comes as part of the Government’s plans to weaken the link between the cost of UK electricity and gas market prices, which are once again soaring as the US-Israeli war on Iran disrupts global fossil fuel supplies.

Energy Secretary Ed Miliband is set to outline the measures in a speech at the “national growth debate” in Westminster later on Tuesday, vowing to “double down not back down” on the shift to clean energy.

The Government has been facing pressure to bring down costs as consumers face high prices at the petrol pumps and looming energy bill rises in the next price cap period from July.

It comes as gas plays an outsized role in the cost of electricity in Britain, setting the wholesale price of power around 60% of the time despite supplying a much smaller and decreasing share of power.

It is hoped the new contracts will deliver benefits on consumers’ bills over the next 12 months, though officials are not yet able to say what savings could be delivered.

Prime Minister Sir Keir Starmer said: “We need to get off the fossil fuel roller coaster – this will make energy bills more stable and take the pressure off family budgets.

“When global gas prices spike, people here shouldn’t be picking up the tab.

“Our focus is simple: easing pressure on household budgets now, while building a homegrown energy system that protects families from global instability in the years ahead.”

The Chancellor said: “Hardworking British families and businesses should not bear the brunt of global gas price shocks while electricity generators are making exceptional profits.

“Alongside moving generators onto the competitive pricing assured through wholesale Contracts for Difference, increasing the EGL to 55% will help to break the link between high gas prices and high electricity prices – offering households and businesses stronger protection against future energy shocks.”

The UK has a marginal pricing system, in which the most expensive source of energy brought on to the grid to meet demand sets the price for all generators, apart from those on other types of contract.

That price-setting source is often gas, leaving British consumers at the mercy of volatile wholesale gas prices, while delivering a windfall for generators such as nuclear and older renewables that are not on fixed contracts.

Britain has already moved from gas setting the price of electricity around 90% of the time in the early 2020s, to around 60% today as it continues roles out clean power across the country.

Mr Miliband said “As we face the second fossil fuel shock in less than five years, the lesson for our country is clear: The era of fossil fuel security is over, and the era of clean energy security must come of age.

“That’s why we’re doubling down on clean power, to give our country energy security and bring down bills for good.”

Speaking today at the Good Growth Foundation, the Energy Secretary set out further measures to help cut bills for families and deliver more clean, homegrown power.

These will include bigger grants for households on heating oil and liquified petroleum gas by increasing the boiler upgrade scheme, taking the total grant to £9,000, faster energy upgrades for social housing and solar panels for schools and colleges.

He will also announced further details on transitional energy certificates to provide greater certainty and clarity for industry looking to invest in already-explored areas near existing licensed fields, supporting a fair and managed transition.