Chancellor Jeremy Hunt unveiled the windfall tax within his Autumn statement on 17 November. Image: Getty.

The solar sector has criticised the introduction of a windfall tax on electricity generators, which it has warned could have a ‘perverse’ impact on the sector.

Officially called the Electricity Generator Levy, the windfall tax was announced last Thursday (17 November) within the Autumn Statement after weeks of speculation. It is set at a rate of 45% on “extraordinary returns from low-carbon UK electricity generation.”

Overall taxation is much higher, as it will not be deductible from profits subject to Corporation Tax, meaning that in effect the rate is 70%. The EU revenue cap mechanism brought in – which caps market revenues at €180/MWh (US$177/MWh) for ‘inframarginal’ electricity generators, and the most comparable mechanism to the windfall tax – is deductible.

Unveiling the Autumn Statement, chancellor Jeremy Hunt stated that “now would be the wrong time to step back from our international climate responsibilities”. However, the tax is at odds with this position, Solar Energy UK has argued.

The tax will not apply to Britain’s coal-fired and gas-fired power stations, and oil and gas producers will pay a lower rate of 35% – a small increase from the 25% rate introduced in May through the Energy Profits Levy.

Solar Energy UK has argued that the Electricity Generator Levy could slow investment in renewable energy while leaving profits from the most carbon-intensive generators unaffected.

“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 tax will cover aggregate revenue that generators make above £75/MWh. Generators whose in-scope generation output exceeds 100GWh annually will be subject to the levy, which will apply only when extraordinary revenues exceed £10 million.

Importantly, the Electricity Generator Levy does not include the Investment Allowance the oil and gas windfall tax does. As part of the Autumn Statement, this was reduced to 29% of investment expenditure, other than decarbonisation expenditure which will continue to qualify for the current 80% rate.

This Allowance has previously been condemned as a loophole by many in opposition parties and green organisations. At its previous rate, it allowed companies could save 91p for every £1 they invest. This nearly doubled the tax relief available, ensuring the more a company invests, the less tax they will pay.

It was further criticised after it emerged that Shell paid no windfall tax on its £8.2 billion (US$9.5 billion) profit in Q3 2022, and bp paid only a minimal amount on its £7.1 billion (US$8.2 billion) Q3 profit.

Not granting renewable energy generators the same ability to limit the tax they pay through investment into additional energy infrastructure, will further impact investment into solar and other renewables, as highlighted above by Hewitt.

There are elements of the Electricity Generator Levy that are still unclear, for example its interaction with the Feed-in-Tariff (FiT). The guidance on the tax fails to mention this legacy regime, as well as installations subject to power purchase agreements, which struck far before electricity prices began to surge.

It does explicitly mention the Contracts for Difference (CfD) support scheme – within which solar secured 2.2GW in the most recent auction – with power generated under this mechanism excluded from the tax.

Perversely then, merchant installations that are unshielded from changes in the electricity prices by CfDs, are those that will be most affected by the tax. But these unsubsidised installations are also the ones that demonstrate how cost-competitive renewables can be. These are the assets the government is choosing to disproportionately penalise with the tax.  

By developing a system where the government steps in during periods of high prices and takes a slice of revenues, project risk could increase significantly. This could potentially make CfDs the only investible route, in direct opposition to the goals of the ongoing Review of Electricity Market Arrangements.

“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 added.

Expanding the system to legacy assets was put forward by the UK Energy Research Centre, and would see project under the Renewable Obligations (RO) scheme offered a new, voluntary, fixed price contract as part of a ‘Pot Zero’ CfD scheme.

As such it could help lower energy bills in the short term, and provide generators with long term security. It is a scheme supported by Solar Energy UK, along with other trade bodies such as Energy UK and RenewableUK .

Solar Energy UK did add that the Autumn Statement offered some positives for the solar sector, pointing to the announcement of £6 billion in funding for the energy efficiency sector from 2025. This could include support for solar thermal technology as well as rooftop photovoltaic panels to power heat pumps or other electric heating kits.

The trade association noted that it is looking forward to receiving further information on the planned ‘Energy Efficiency Taskforce’.