UK to raise windfall tax on electricity generators to 55% unless they sign fixed-price contracts

Electricity generators will face higher windfall taxes unless they sign up to long-term fixed price contracts under government plans to protect bill payers from future gas market price shocks, as the Iran war pushes up energy prices.

The Treasury will increase an existing windfall tax on excess profits made by electricity generators in Great Britain when gas prices spike by raising the rate from 45% to 55%. The funds raised will help the government to support households during an energy crisis.

The owners of "legacy" renewable energy projects, such as older wind and solar farms, that earn subsidies on top of the market price will face the higher tax rate until they sign up to contracts that pay a set price for electricity as part of the government's plan to "delink the price of electricity from the price of gas".

The plans, first revealed by the Guardian, mark the government's most radical attempt to weaken the impact of soaring wholesale gas prices on the UK's electricity costs, which are some of the highest in any developed economy.

Announcing the plans on Tuesday, Keir Starmer said: "When global gas prices spike, people here shouldn't be picking up the tab.

"Our focus is simple: easing pressure on household budgets now, while building a homegrown energy system that protects families from global instability in the years ahead."

Officials confirmed the market intervention alongside plans to accelerate the rollout of clean energy projects and encourage the uptake of electric alternatives to fossil fuels as the "only route to energy security and bringing bills down for good".

UK household energy bills are expected to rise from July as the conflict in the Middle East pushes up global energy costs. The measures were set out before a speech on Tuesday by Ed Miliband, the energy secretary, in which he is expected to say that the lesson from the second fossil fuel shock in less than five years is to "double down, not back down, on our mission for clean energy".

In a statement, Miliband said: "The era of fossil fuel security is over, and the era of clean energy security must come of age. That's why we're doubling down on clean power, to give our country energy security and bring down bills for good."

The Guardian reported last week that "legacy generators" will be offered the opportunity to sign up to the new wholesale contracts for difference (CfDs), which are similar to deals struck by low-carbon projects since 2017, or face higher rate of tax on their profits through the electricity generator levy (EGL).

The chancellor, Rachel Reeves, said: "Alongside moving generators on to the competitive pricing assured through wholesale contracts for difference, increasing the EGL to 55% will help to break the link between high gas prices and high electricity prices – offering households and businesses stronger protection against future energy shocks."

Since late 2022 generators have faced a 45% tax rate on electricity sold at market prices above £75 a megawatt hour through the EGL put in place after the war in Ukraine led to record gas market prices across Europe.

Power market prices have surged again in recent weeks, from about £74/MWh to more than £100/MWh, and officials fear they will climb higher if the disruption lasts into winter.

Securing the bulk of the UK's electricity from fixed-price contracts should mean electricity costs will fall and bill payers would be less exposed to sudden market price shocks.

The proposal was first put forward by analysts at the UK Energy Research Centre in April 2022 to guard against surging gas prices after Russia's invasion of Ukraine. They said it could save between £4bn and £10bn a year if market prices remained high.

The UK has emerged as one of the countries most exposed to volatility in the fossil fuel markets because it generates about 30% of its electricity from gas plants, which set the price for the market overall. This means higher market prices provide a windfall for renewable energy, biomass and nuclear reactors – unless they generate power based on a guaranteed fixed-price contract known in the industry as a contract for difference.