The plan will relieve the government’s energy price guarantee – but there are fears the move will reduce incentives for companies to produce electricity from green sources
Liz Truss will try to get her government back on track by capping electric company profits to save taxpayers billions and stave off calls for an unexpected tax.
Business Secretary Jacob Rees-Mogg is set to publish legislation on Wednesday turning the energy support package into law and restructuring the way electricity markets operate.
Currently, the wholesale cost of electricity is linked to the price of gas, the most expensive form of energy. This means that companies producing wind, solar or nuclear energy have made huge profits even though the world market price of their product has not increased significantly.
As part of a temporary “cost-plus-revenue cap”, wholesale costs for renewable electricity will be reduced by up to 80 percent by early 2023, roughly to levels prevailing before global gas prices spiked a year ago started to rise.
The limit will be set at a price that “allows growers to cover their costs and earn reasonable revenues that reflect their operational performance, investment commitment and risk profile,” according to the government.
Electricity bills for the average household are likely to be around £700 a year, which was the same as Ofgem’s price cap last winter.
Because of the Energy Price Guarantee, which requires the government to heavily subsidize energy bills over the next two years, the biggest savings come from capping by the state, reducing the amount it has to pay suppliers.
If the cap were to continue beyond fall 2024, it would directly weigh on household bills by keeping the cost of renewable energy below that of natural gas.
Ministers have resisted political pressure for an expanded windfall tax that would be levied on power generators’ profits, but Labor claimed the new system would eventually have a similar effect.
Ed Miliband, Shadow’s climate secretary, said: “The Government has finally accepted in principle Labor’s call for an unexpected tax on excess profits from electricity generators. After months of telling the country they were absolutely against the principle of a windfall tax, they were kicked and shouted at to implement it.”
Mr Rees-Mogg said: “We have been working with low-carbon generators to find a solution that ensures consumers do not pay significantly more for electricity from renewables and nuclear power.
“That is why we have stepped in today with extraordinary powers that will not only ensure vital support reaches homes and businesses this winter, but will transform the UK into a nation that provides safe, affordable and well-priced, homegrown energy for all. ”
The Energy Price Bill will also include clauses to ensure existing government support for bills, including a £400 rebate for each household, reaches those who are meant to benefit by fines landlords who refuse to pass on the savings .