Windfall tax hitting ScottishPower and SSE 'could damage green ambitions'

Energy legislation that puts a ceiling on what wind farms and nuclear power plants earn to keep household energy bills down will apply in Scotland, contrary to initial statements made by the UK Government.

But energy firms fear intervention will hit renewables investment just as the country is pushing for supply security and to meet its climate goals.

They say the cap should not be set so low that it stifles investment in low-carbon technologies such as wind and solar, which will be needed to reach the net zero emissions targets.

The move means that Glasgow-based ScottishPower and Perth-based SSE will not escape the temporary “cost-plus revenue limit” which is aimed at cutting the impact of wholesale prices on consumers and the taxpayer by capping the amount green energy generators can make.

Prime Minister Liz Truss has previously poured cold water on calls to tax the profits of energy giants to fund her £60bn energy price guarantee scheme which has frozen energy bills.

UK ministers say the proposals would ensure consumers and businesses pay a fair price for energy.

A windfall tax on the UK oil and gas sector was introduced in May, described as a 25% Energy Profits Levy, applying to companies that extract UK oil and gas.

The precise mechanics of the renewables 'windfall tax' will be subject to a consultation to be launched shortly. The UK government has given no details of the expected price limit on revenues generated by renewable energy companies.

When asked how much money the cap scheme would raise for the government at a committee hearing, climate minister Graham Stuart said he did not have the figures "immediately to hand".

The voice of renewables in Scotland said the Energy Prices bill could damage the industry.

Claire Mack, chief executive of Scottish Renewables, said that UK government plan will act as "a 100% windfall tax on renewable generators above a certain as-yet unspecified level".

"Enacting a revenue cap on low-carbon generators ignores the fact that in the long-term, the best way to cut household energy bills is by increasing energy efficiency and building more of the cheap renewable electricity capacity which our industry can provide.

"Energy is a global market and policy decisions made by the UK Government in recent years have already damaged the country's attractiveness to the international investors who we need to fund the country's £1.4 trillion transition to net-zero.

"The renewable energy industry wants to actively engage with government on this issue to protect the opportunity for investment and growth that developing and accelerating renewables in the UK presents. "The long-term solution to this problem is firm commitments to cheap, clean renewable capacity and we would urge UK Government to keep that front of mind."

She said the revenue cap proposed by the UK Government required "careful consideration to ensure it will incentivise the energy system the UK needs, a system which utilises the cheapest forms of clean power supplied at a stable price".

And she added: "Excess oil and gas profits have been levied with a surcharge of just 25%, and the investment allowance given to oil and gas companies offers a huge incentive to invest in the energy sources which are at the root of the price crisis.

"While industry understands the need for action on consmer bills here and now, the UK Government must ensure that the country is not locked in an enduring dependency on the very fuels which are the root of the problems we are currently facing."

The Energy Prices Bill also puts into law ministers' promises to cap dual fuel bills to an average of £2,500 for the next two years.

The UK government says their cap is aimed to "break the link between abnormally high gas prices and how much revenue low-carbon electricity generators receive".

Renewable generators have been able to sell energy at wholesale rates dictated by gas, forcing up costs for consumers even though renewable energy is generally cheaper to produce.

But Dan McGrail, chief executive of RenewableUK, said that the move risks sending the "wrong signal" to investors in renewable energy in the UK, and skewing investment towards fossil fuels.

An SSE spokesman said: “Any revenue cap must be set at a level that doesn’t discourage essential investment in the UK’s renewable energy sector and therefore should be comparable to other countries.... After all, the key lesson of the current energy crisis is the need to bolster our homegrown energy defences.

“It is also vital that the cap does not negatively impact on security of supply this winter, therefore flexible technologies, such as hydro, that require strong price signals to meet demand when most needed should be excluded.

"We will now work with the Government on the details of the policy to ensure it meets its objective of addressing extraordinary profits without throwing away the UK’s global leadership position on renewable energy investment."

Scottish Development International says the nation is "the powerhouse of Europe for offshore and onshore renewable energy and low carbon projects". As of 2019 some £3bn of green investment projects was due to be released to transition to a carbon neutral economy by 2045.

UK Government confusion over whether the renewables profits cap needed legislative consent north of the border meant the Department for Business, Energy & Industrial Strategy said it would need to liase with Scottish ministers to confirm whether the measure will extend to Scotland.

But a Scottish Government source said: "We have taken advice and it is a reserved matter. They can legislate on this in Scotland and it will ultimately apply here.

The source said that the SNP government was in favour of the capping plan in principal but that the devil may well be in the detail, A Scottish Government spokesman spokesman said: “The Scottish Government has repeatedly called on the UK Government to introduce short-term solutions to decouple the market price of renewable and low carbon electricity from the cost of gas.

“This mechanism must be designed carefully in order not to damage investment in our renewables sector, as well as not unfairly penalising those companies which are not making super-normal profits.”

The UK government said it has been working closely with industry on the detail of the proposal, ahead of it coming into force from the start of 2023.

"It will ensure consumers pay a fair price for low carbon energy and has the potential to save billions of pounds for British billpayers, while allowing generators to cover their costs, plus receive an appropriate revenue," said the a UK government spokesman.

It comes amidst persistent protests over revenues energy firms are making while household energy bills skyrocket.

The Herald revealed that ScottishPower which has been pushing for a taxpayer-backed £100bn fund to help energy firms freeze energy bills has handed over nearly £7bn in dividends to its foreign owners since being taken over 14 years ago.

Keith Anderson, chief executive of Scottish Power, said it was deeply worried at the suggestion renewable generators are making "extraordinary profits".

He said: "It's disappointing that such a significant market intervention by the government has come with so little detail, all this does is create uncertainty.

"This crisis has been caused by the cost of gas and it's strange the proposed solution is to cap the price of low-carbon generation and to leave the gas sector untouched."

UK ministers believed the cap would allow consumers to pay a fair amount for their electricity, and ensure electricity generators are not unduly profiting from the energy crisis caused in part by Russia’s invasion of Ukraine.

"This is planned to be a temporary measure to deal with the exceptional market conditions driven by high global gas prices, in light of Russia’s invasion of Ukraine, and it is anticipated that this will endure until such time as the markets return to normal or generators move onto other market arrangements," said a spokesman.

"The limit will still allow generators to cover their costs and receive an appropriate revenue that reflects their operational output, investment commitment and risk profile."

The business and energy secretary Jacob Rees-Mogg has denied that the energy plan amounts to a “windfall tax”.

He said:"It is not a windfall tax, it's clearly not a tax. It's nothing to do with the profits these companies are making."