Government to consult on the introduction of Cost-Plus-Revenue Limit

The government issued its Energy Prices Bill on 12 October. The bill will put in law a number of the already-announced mechanisms that will be used to support households and businesses this winter including the Energy Price Guarantee and the Energy Bill Relief Scheme. Also announced alongside this is the government’s intention to consult “shortly” on a Cost-Plus-Revenue Limit which will put a cap on all excess revenues renewable generators are receiving. The cap will still allow generators to cover their costs and receive an appropriate revenue that reflects their operational output, investment commitment and risk profile, and is expected to be in place from the beginning of 2023.

The government does not consider this intervention to be a windfall tax noting that it will be applied to excess revenues generators are receiving, as opposed to applying to all profits. A costs plus revenues model would also allow fuelled generators such as biomass to take account of cost of fuel if they were within scope of the scheme. While many of the details remain unclear and will be subject to industry consultation, the government maintains that any cap will be temporary and is intending to run a voluntary Contracts for Difference process for existing renewable generators in 2023, in-line with the commitments from Liz Truss’ speech on 8 September.

One of the areas that will require clarity will be the price that is determined for the Cost-Plus-Revenue Limit. The EU has recently agreed an Inframarginal Revenue Cap for renewable generators, with the price set at €180/MWh, however early reports from the Financial Times have suggested government negotiations were starting at £50-60/MWh. Wind and Solar assets successful in the latest Contracts for Difference round achieved a price of ~£40/MWh (in 2012 prices) and BEIS has said one relevant factor that will be considered is the “pre-crisis expectations for wholesale prices”. One area that has been confirmed is that renewable generators will continue to be able to receive existing subsidy support payments such as Renewable Obligation Certificates on top of this.

The introduction of a cap on revenues is a swift change of direction from a government that had previously been against any form of windfall tax. At a critical time when policy and regulation need to be aligning to support ambitious net zero targets, an enforced cap on revenues is very much untested waters. Existing policy schemes such as the Renewables Obligation (RO) and the carbon price support were fully cognisant of the merit order effect to drive investment, with ~30GW of renewables supported under the RO alone. The Committee on Climate Change has noted that net zero investment needs to grow to £50-60bn a year by 2030, nearly double the £30bn a year currently invested. If there is an investment hiatus as investors take stock of high-level market intervention this investment gap will only grow.

While the Cost-Plus-Revenue Limit looks like it is intended to be temporary, there are still many uncertainties. Using the argument that a certain amount of profit over the top of base costs is unethical in the current market may justify implementation to many but will raise questions about what the trigger for withdrawal is. If the revenue limit is set at a high enough level to not deter investment, at what point is it ethical to withdraw it? There will also be links to the consumer support schemes, even if only indirectly comparing the maximum prices the government thinks consumers can pay with the maximum levels it thinks low carbon generators can ear.

Building and investing in renewables is seen to be a critical route out of reducing dependency on gas, but there is a possibility that there will be a risk premium on investments after these interventions. If this manifests itself the costs of transition grows.

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