Electricity generators threatened with higher windfall taxes in bid to ensure stable prices

Move marks UK government’s most radical attempt to weaken impact of soaring wholesale gas prices on electricity costs

Electricity generators will face higher windfall taxes unless they sign up to long-term fixed-price contracts under UK government plans to protect bill payers from future gas market price shocks, as the Iran war pushes up energy prices.

The Treasury will increase a windfall tax on excess profits made by electricity generators in Great Britain from 45% to 55% when gas prices spike. The funds raised will help the government to support households during an energy crisis.

The owners of “legacy” renewable energy projects, such as older wind and solar farms, that earn subsidies on top of the market price, will face the higher tax rate from July unless they sign up to contracts that pay a set price for electricity. The move is part of the government’s plan to “delink” the price of electricity from the price of gas.

Gas prices currently determine costs on Great Britain’s electricity market around two-thirds of the time, even though renewables make up more than half of generated power. This link is expected to weaken significantly by the 2030s as renewables play a greater role, but the government hopes that this could be achieved sooner.

The plans, first revealed by the Guardian, mark the government’s most radical attempt to weaken the impact of soaring wholesale gas prices on Britain’s electricity costs, which are some of the highest in any developed economy.

Announcing the plans on Tuesday, Keir Starmer said: “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.”

Officials confirmed the market intervention alongside plans to accelerate the rollout of clean energy projects and encourage the uptake of electric alternatives to fossil fuels including heat pumps, solar panels and electric vehicles.

UK household energy bills are expected to rise from July as the conflict in the Middle East pushes up global energy costs. Under the government’s quarterly price cap a dual fuel bill could cost £1,836.84, according to energy analysts at Cornwall Insight, up almost £200 a year from the current cap.

The government’s measures were set out before a speech on Tuesday by Ed Miliband, the energy secretary in which he said the government “will double down, not back down on our mission for clean energy”.

Miliband said: “The era of fossil fuel security is over, and the era of clean energy security must come of age.”

The Guardian reported last week that “legacy generators” which make up about 30% of the UK’s power capacity – or about 35 gigawatts – would be offered the opportunity to sign up to the new wholesale contracts for difference (CfDs), which are similar to deals struck by low-carbon projects since 2017, or face higher rate of tax on their profits through the electricity generator levy (EGL).

The chancellor, Rachel Reeves, said on Tuesday: “Alongside moving generators on to 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.”

Cover photo:  Renewable energy projects that earn subsidies on top of the market price will be asked to sign up to contracts that pay a set price for electricity. Photograph: Ben Birchall/PA