Chancellor Rachel Reeves is preparing to raise the windfall tax on low-carbon electricity generators to help curb household energy bills, according to the Guardian, with plans to announce the increase as early as Tuesday alongside broader reforms to decouple electricity pricing from gas market volatility.
The proposed hike targets the electricity generator levy, which currently applies a 45% tax rate on power sold above £75 per megawatt hour from nuclear, biomass and renewable projects built before 2017, and is set to expire in March 2028. Reeves said the move aims to raise Treasury funds in the short term to shield consumers while the government consults on long-term changes to the wholesale market.
Officials also plan to consult on shifting older, low-carbon projects currently supported by the renewables obligation scheme onto newer set-price contracts that guarantee a fixed rate for electricity, insulating them from gas price swings. Executives across the industry were alerted on Friday to expect contact from officials on Monday outlining the government’s determination to protect electricity costs from gas market surges.
Reeves signalled the dual approach during remarks at the IMF conference in Washington DC on Thursday, where she said the government was considering “quite a big change” to weaken the link between gas and electricity costs, calling it “absolutely the right thing to do.” Her comments triggered an immediate market reaction, with SSE shares falling more than 6% on Friday to their lowest level since the Iran war began seven weeks ago, while Centrica dropped 5% and Drax declined 3%.
For more on this story, see Top 100 Oil and Gas Companies Bank $23 Billion in Monthly War Windfalls.
The sell-off reflected investor concerns that breaking the marginal cost pricing model — under which gas-fired plants typically set the wholesale electricity price — would compress margins for utilities that have benefited from elevated gas prices. Both SSE and Centrica have seen higher revenues during periods of energy market volatility, and any shift to decouple pricing could reduce revenue predictability.
Reeves and Energy Secretary Ed Miliband are working together on a “practical way” to delink electricity and gas prices, with the Chancellor noting she has long been attracted to the idea. She argued that when gas prices rise, consumers pay more for electricity even when production costs for wind, solar or nuclear remain unchanged, particularly as electricity forms an increasing share of the UK’s energy mix.
Miliband has consistently linked Labour’s renewable energy push to ending the UK’s reliance on the “fossil fuel rollercoaster,” noting that renewables have already reduced the proportion of time gas sets wholesale electricity prices by about a third since the early 2020s, according to the Department for Energy Security and Net Zero. Dhara Vyas, chief executive of Energy UK, echoed that decoupling would approach gradually as more renewables enter the system.
In addition to pricing reform, Reeves confirmed the government is encouraging investment in North Sea oil and gas tiebacks — satellite wells to exploit existing fields — a policy she announced in last year’s budget. She did not specify whether this expansion of fossil fuel infrastructure conflicts with the long-term goal of reducing gas’s influence on electricity pricing.
Will the windfall tax increase apply to all low-carbon generators?
No, the increase will apply only to nuclear, biomass and renewable energy projects built before 2017 under the existing electricity generator levy, which is scheduled to expire in March 2028.
How soon could households spot lower energy bills from these changes?
The Treasury expects the windfall tax hike to raise short-term funds to help shield consumer bills immediately, while long-term pricing reforms are still under consultation and would grab effect later, if implemented.
Why did utility shares fall after Reeves’ comments?
SSE and Centrica shares dropped more than 5% because investors fear that decoupling electricity prices from gas markets will reduce the revenue predictability and margins these companies have gained during periods of high gas prices under the current marginal pricing model.