The UK government has threatened energy companies with a cap on the revenues they make from sky-high wholesale power prices — unless they strike voluntary deals with the state.
Prime minister Liz Truss’s government has been in talks with renewable and nuclear energy generators for weeks about how to reduce wholesale power prices, which closely track those of natural gas.
The government has been hoping to persuade electricity generators to agree voluntarily to 15-year fixed price contracts well below current wholesale rates for their output as a first step towards a wider market reform.
The talks were mentioned by the chancellor Kwasi Kwarteng in the recent “mini” Budget as an important move “to bring down wholesale prices”.
The fixed price agreements are partly designed to replace agreements previously used by the government to incentivise renewable energy that reward generators with a subsidy on top of wholesale rates.
These legacy “renewables obligations” have led to some energy companies making huge profits as wholesale electricity has followed gas prices and risen to record levels since Russia’s invasion of Ukraine.
The proposed 15-year fixed price contracts would be similar to the newer “contracts for difference” agreements that are already used by the government to incentivise new offshore wind farms.
Under CFDs, when wholesale prices exceed a fixed level generators pay back the difference to a government body called the Low Carbon Contracts Company. When the wholesale market rate is below the fixed price, the government tops up the difference.
The government is keen to have a deal with generators in place in time for winter, according to three people involved in the discussions.
But negotiations have been complicated by the fact that most energy companies have already sold in advance significant proportions of their expected production for the next two years, and would incur severe financial penalties to unwind those agreements with customers.
Generators have been arguing for contracts that only cover unhedged volumes but they would have little effect on wholesale power prices this winter — or possibly even next year.
One person involved in the discussions said legislation was another “means to ensure a fair [wholesale power] price”.
“When you talk to [the] government it’s like volunteering in the army, you are always looking for volunteers but there is always legislation if the volunteers don’t come forward,” the person added.
Another person familiar with discussions confirmed electricity generators had been warned that legislation to cap revenues was a possibility if voluntary agreements could not be reached.
Some electricity generators have privately expressed the view that a windfall tax on profits — similar to that imposed on oil and gas producers by the former chancellor Rishi Sunak in May — would be preferable to a compulsory limit on wholesale prices.
The EU has proposed a mandatory threshold for the prices charged by renewable, nuclear and other non-gas electricity generators in continental Europe as part of proposals that are intended to raise €140bn.
“[An EU-style cap] would be considerably worse for the low-carbon industry [in Britain] than a windfall tax is for oil and gas,” the person familiar with the UK talks added.
Keith Anderson, chief executive of ScottishPower, one of Britain’s largest energy companies, said last week at the Labour party conference that moving renewable energy generators off legacy subsidy contracts on to new 15-year fixed price deals would be complicated given the older agreements vary in length and size.
“Trying to fix one price that covers all of that is mission impossible and is doomed to failure,” he said in comments reported by the magazine Utility Week.