Responding to the Energy Prices Bill announced today (12 Oct), Merlin Hyman, Chief Executive at Regen, commented:
“Regen and the renewable energy industry are fully behind ensuring that the benefits of low-cost renewables flow to customers. We have been calling for a ‘New Deal’ whereby consumers see the benefit of lower-cost renewable energy in their bills while generators, and their investors, receive sufficient revenue certainty to bring forward investment.
We are therefore pleased that the government has confirmed it is still planning to enable existing generators to access Contracts for Difference on a voluntary basis in 2023, and to accelerate the CfD scheme for new generators. This is the best way to enable generators to exchange high short-term prices for long-term revenue confidence.
However, announcing outline plans for a ‘Cost-Plus Revenue Limit’ windfall tax on revenues of renewables and nuclear, with few details of the price or scope, risks damaging investor confidence and the function of the market.
Over the past 24 hours, we have received calls from developers and investors who are trying to figure out what the government policy actually is, at a time when we urgently need hundreds of billions of pounds invested in new renewables and storage.
The proposals so far look like a worse deal than the windfall tax imposed on oil and gas companies, effectively taxing renewables to prop up investment in fossil fuels. It is vital that the government gets the detailed design of this measure right.”
Eleven critical issues that still need to be addressed:
- A proper explanation of the basis for the scheme is needed. There has been unhelpful ambiguity around whether the ‘Cost-Plus Revenue Limit’ scheme is a form of market price cap or a revenue tax. Our understanding is that market prices will not be capped, but that the Cost-Plus Revenue Limit scheme will operate as an excess revenue tax (i.e. a windfall tax) which will be based on a calculation of what would have been a ‘fair’ price for electricity.
- How this ‘fair’ price is calculated remains unclear. Will it be based on the wholesale price prior to the war in Ukraine, or will it be based on what was a reasonable expectation of future electricity prices prior to the Ukraine war (which were already rising due to other market factors, such as post-covid inflation and increasing levels of demand from China)?
- Will revenue be based on actual revenue received (in the form of a return submitted by generators), or could it be calculated in some ‘deemed’ way based on revenues that might be expected in the market? The latter could be punitive for some generators and almost certainly open to legal challenge.
- Will all renewable generators be covered and be required to submit a revenue return? Or perhaps only those receiving ROCs?
- How long will the scheme last, and will it be backdated? How quickly will a CfD-type arrangement replace it, and will all generators have the opportunity to join a CfD scheme if they wish?
- Will the revenue limit calculation be made on a settlement period basis (half-hourly) or averaged over a longer timeframe, such as monthly or quarterly?
- How will Community Interest Companies be treated? Community generators may have already committed higher revenues to pay for additional community benefit schemes such as alleviating fuel poverty. Their revenues may have increased, but their ‘surplus’ will not.
- The press release hints that nuclear and biomass may be treated differently. There may be a case in that biomass fuel costs have risen (this needs to be evidenced). Still, there is no case that the marginal costs of legacy nuclear plants have increased or that their future energy price expectation could reasonably be higher than those of renewable generators.
- Electricity is often traded several times before reaching the consumer (known as the churn rate). How will energy traders be treated, and how will the policymakers ensure that lower-cost renewables are not then traded at higher prices, or even exported, before reaching the UK consumer?
- Will electricity sold in the Balancing Mechanism be treated the same way as the wholesale market? And what unintended consequences could this have?
- How will electricity that is exported via interconnectors be treated, and could this increase exports at times of supply shortage in the UK? Could we then end up re-importing energy at a higher price?
For more information contact: Emma Smith, Policy and Advocacy Coordinator, esmith@regen.co.uk