Earlier this month the government announced a policy that will stop renewable energy generators from making abnormally high profits. Previously the government had said they were not putting a windfall tax on suppliers.
Even though energy companies have seen huge profits this year government were still keen to not put a windfall tax on suppliers. When Liz Truss first set out her plan to fix the energy crisis the UK was in, she wanted to focus on energy security in the UK. In her opinion, the only way to improve energy security was to ensure that companies would invest in renewable energy projects in the UK. However, a windfall tax might make them do the opposite of this.
The government introduced energy support for household and business consumers. Many people called for a windfall tax to be imposed to help pay for this support to ensure taxpayers would not end up having to pay in the long run.
Although the government have refused a windfall tax it looks like they have been left with no choice as they introduced a policy called Cost-Plus Revenue Limit. The new policy is very similar to a windfall tax and will most likely have the same impact as a windfall tax would on energy companies.
What is the Cost-Plus Revenue Limit?
Former business secretary Jacob-Rees Mogg introduced the new policy as part of a new Energy Price bill that is currently being introduced. This policy is to be introduced in England and Wales and aims to decouple gas prices from electricity produced from renewable energy.
When the energy market was first created gas and electricity prices were linked due to gas being the main source of creating electricity. This means that wholesale electricity prices are set by a gas fired generation which is the most expensive form of generation. Low carbon generators are therefore benefitting from abnormally high profits as it is much cheaper to produce electricity in this way.
The Cost-Plus Revenue Limit aims at limiting the amount of money renewable energy generators can make from the start of 2023.
What differentiates the new policy from a windfall tax?
The former business secretary has denied that this policy is a windfall tax as it has nothing to do with the profits that these companies earn.
A typical windfall tax would also take a certain amount of all profits. However, this policy will only be applied to those who earn over a certain amount of profits. These vague differences don’t matter as it will make the same impact either way.
Due to this, it has been called a de facto windfall tax as it is still making the same impact on energy suppliers.
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