Sunak cools on energy firms’ windfall tax

Whitehall looks to French market as it plots reforms to take advantage of low wind and solar power costs

Ministers are backing away from a windfall tax on Britain’s electricity generators in favour of a Frenchinspired consumer price mechanism in a battle to tame inflation. A new system would break the link between the price of low-carbon electricity and that of natural gas, which has risen to record highs. This would allow energy suppliers to take advantage of the comparatively cheaper cost of electricity generated by wind and solar farms – and pass on the savings.

MINISTERS are backing away from a windfall tax on Britain’s electricity generators in favour of a French-inspired consumer price mechanism in a battle to tame inflation.

Under plans being drawn up in Whitehall, a new system would break the link between the price of low-carbon electricity and that of natural gas, which has risen to record highs following Russia’s war on Ukraine.

This would allow energy suppliers to take advantage of the comparatively cheaper cost of electricity generated by wind and solar farms – and pass on the savings to households and businesses.

In France, most electricity is generated by nuclear power. This has meant Emmanuel Macron’s government has been able to order EDF to sell energy at below market rates, shielding consumers.

It is thought that the reform plan is now being considered by Treasury officials after the Chancellor cooled on the idea of a windfall tax on generators. Ministers have already swooped with a tax on the surging profits of the oil and gas industry, prompting claims they were “throwing red meat to socialists”.

It comes after soaring wholesale energy prices pushed energy bills up 54pc on average in April. They are on course to rise by another 40pc, triggering the tightest cost of living squeeze in a generation.

The Bank of England predicted this week that inflation will climb to 11pc this year, as it increased interest rates by a quarter of a percentage point to 1.25pc – the fifth successive rise.

Rishi Sunak, the Chancellor, last month announced a £21bn support package to help households pay their bills. But he is believed to be keen on wider electricity market reform that would help address the problem at its root, while also helping the market adapt in line with the shift towards greener energy.

“The Government is consulting with the power generation sector and investors to drive forward energy market reforms and ensure that the price paid for electricity is more reflective of the costs of production,” he told the House of Commons last month.

Analysts said the move made sense but would do little to ease the immediate pressure on households given the time taken to bring in any reforms.

Tom Edwards, of energy consultancy Cornwall Insight, said: “Reform of the electricity market is necessary for meeting the demands of a net zero world and having a 21st century system, but it is unlikely to fix the cost of living crisis this winter.

“This is a change that will take a long time to implement, possibly around two to three years.”

Currently, less than 40pc of Britain’s electricity is generated in gas-fired power plants. But its important role in the electricity system means that gas effectively sets the price of electricity across the market.

It means that consumers are seeing less benefit in their bills from other sources of generation which do not have gas fuel costs, such as wind and solar panels. With the role of these in electricity generation growing, so is the case for market reform.

It comes as Mr Sunak is believed to be mulling a windfall tax on electricity companies who have benefited from high wholesale prices in recent months, having recently introduced one on North Sea oil and gas producers.

He is facing a push-back from industry figures who argue it could deter vital investment in energy, however, with many arguing wider market reform should take priority.

The UK’S current inflation rate of 9pc compares with 5.8pc in France. The French government has helped keep household energy bills down after ordering its state-owned electricity company, EDF, to sell more power at artificially lower rates to rivals.

EDF has said the move will cost it up to $8.4bn (£6.8bn).