Hot on the heels of the UK’s Prime Minister publicly committing to not implementing a windfall tax on top of the windfall tax she voted for under the previous Prime Minister, her government has announced plans for a ‘cost-plus revenue limit’ on wind and other low carbon generation.
This is not a windfall tax, as it has a different name and rather than the government taking money from generators they plan to appoint a ‘Payment Administrator’ to take money from generators.
And, unlike a windfall tax, it’s not a fixed shared of profits; rather, it’s a potentially more punitive levy that could take anything from 100% of revenues over the average pre-crisis power price of £50/MWh down to 25% of revenues over £150/MWh. We just don’t know how punitive, because Government has yet to release the detail. And it doesn’t need to.
This is exciting for investors, who love it when governments take sweeping powers to randomly confiscate revenues without any particular warning. Clearly, this will absolutely not increase capital costs for the 50GW of offshore wind we need to get to the 2035 decarbonisation target.
The whole purpose of this move is to extract costs from the wholesale power stack, reducing the burden on consumers and not incidentally the UK Exchequer, given that it’s now on the hook for billions in energy costs. This would nearly be fine, if there was reason to believe it would have this impact.
The tax is on generators, so those who've sold their power on forward contracts or Power Purchase Agreements (PPAs) are likely to avoid it, depending on the price of that contract. Merchant generation will be caught, however.
Moving the goalposts
Those of us old enough to remember that Electricity Market Reform in the early 2010s was sold on the basis that it would eventually lead back to investment being driven by the wholesale market are today lighting a candle for the demise of that idea.
It’s difficult to see how anyone investing in UK wind can ever include wholesale revenues in their business case again, unless they want to be mocked by financiers.
How will merchant generators respond?
With this in mind, I assume that all current merchant generators are hurriedly looking to sell their output on the forward markets, traders in which are doubtless rubbing their hands together in delight.
The legislation to implement this ‘not-a-tax’ is focused on generators, not on other people who happen to own their power now and who will still be able to sell it at current, stunningly-high prices.
While there are provisions in the legislation that enable the UK government to require certain types of information from generators and to amend licence conditions directly – something else that investors will in no way find terrifying – it’s difficult to see the government actively forbidding forward trades in power. Not unless it wants the UK’s financial nerve-centre, the City of London, to start bashing down its door more than it already is.
This means that the government has brought forward legislation that is likely to significantly increase political risk for wind investors while being unlikely to actually impact costs that much. Why might it have done that?
There is a potential answer here, and handily it's in the same announcement as the windfall tax: The government will also give itself powers to run a voluntary Contracts for Difference (CfD) process in 2023.
Readers of Windpower Monthly will be aware that the government has been negotiating bilateral CfDs with major sector players for the past couple of months, and has been unable to persuade them to sign up to taking a haircut on the total value of their revenue.
Without a cudgel – without a windfall tax on the table – the UK government’s negotiating position was weak.
Now that they are back on the table albeit under a different name, the dynamic of these negotiations will change.
If you own a merchant wind asset, you’ll need to decide whether you can retain more of your revenue envelope under an as-yet-undefined revenue confiscation regime, or accept a known – lower - quantum of revenue on a CfD.
As more details about the windfall tax begin to emerge, this debate will tighten. I anticipate the government will look to ensure that a CfD is more palatable this time round.
Adam Bell is head of policy at Stonehaven and former head of energy strategy at the UK Department of Business, Energy and Industrial Strategy