Rachel Reeves to raise windfall tax on low-carbon electricity generators

The chancellor is ready to hike the levy introduced in 2022 to target the excess profits made by the owners of older renewable energy and nuclear plants as electricity market prices soared after Russia’s full-scale invasion of Ukraine.

She could announce the plans to raise the so-called electricity generator levy as early as Tuesday, alongside a consultation on “radical” proposals to permanently weaken the link between soaring gas market prices and the cost of Britain’s electricity for the long term.

Executives across the industry have been told to expect contact from officials on Monday to set out the government’s determination that electricity costs should be protected from the surge in gas markets and be set more often by cheaper renewable sources.

Currently, the overall price is set by the most expensive source of power, which is usually gas power plants. This has led to a surge in electricity market prices across Europe, but particularly in countries such as the UK that rely on gas.

The plans to increase the generator levy – which applies to nuclear, biomass and renewable energy projects built before 2017 – will be used to raise Treasury funds to help shield consumer energy bills in the short-term while the government consults on long-term plans to reform the wholesale market.

The government is also expected to consult on plans to shift older, low-carbon projects subsidised by the government’s renewables obligation scheme on to the newer set-price contracts, which provide electricity at a guaranteed price.

The industry was put on alert after Reeves said on the sidelines of the IMF conference in Washington DC on Thursday that the government was considering “quite a big change” to weaken the link between gas and electricity costs that was “absolutely the right thing to do”.

Her comments caused shares in SSE to fall more than 6% on Friday to the lowest level since the war in Iran triggered a surge in global energy prices that pushed the company’s market value to an all-time high last week. Centrica, the owner of British Gas, closed down 5% and Drax fell 3%.

The companies are in line for higher revenues due to the sharp rise in energy market prices since the Iran war began seven weeks ago. Under the electricity generator levy, the generators currently face a 45% tax rate on electricity sold at market prices above £75 a megawatt hour. The levy is due to expire in March 2028.

The electricity market price surged from around £74/MWh to over £100/MWh as the conflict in the Middle East escalated last month, and officials fear they will climb higher if the disruption stretches into winter.

The government is understood to be considering plans to call on the UK’s legacy low-carbon projects – such as nuclear plants and older wind and solar farms – to sign up to the same contracts used by new projects at a set price agreed with the government.

The proposal was first put forward by analysts at the UK Energy Research Centre in April 2022 to protect the UK’s electricity costs from surging gas prices. They said it could save between £4bn and £10bn a year if market prices remained high.

A separate proposal set out by the Stonehaven consultant Adam Bell, the government’s former head of strategy at the Department for Energy Security and Net Zero, includes the “radical step” of removing gas plants from the market and holding them in strategic reserve to be fired up when needed without distorting the overall cost of electricity in the wholesale market.

Bell said the plan, which could take £80 a year off energy bills, would be “a transfer of value from producers to consumers to a degree we haven’t seen for 20 to 30 years” by helping consumers to benefit from the energy transition.

Sources told the Guardian there was “consternation” over the plans, which could spell a fundamental reform of energy markets to weaken the link between gas market prices and electricity costs at a time of increased risk and volatility.

The government declined to comment.