Is government plan to cap revenues of renewable electricity generators a windfall tax?

It is not a windfall tax. It's clearly not a tax. It's nothing to do with the profits these companies are making.

After months of telling the country they [the government] were utterly opposed to the principle of a windfall tax, they have been dragged kicking and screaming to implement it.

On the Today programme Jacob Rees-Mogg, the Secretary of State for Business, Energy and Industrial Strategy (BEIS), denied that a new government policy proposal limiting the earnings of renewable electricity generators in England and Wales, was a windfall tax. 

This followed reporting by some media outlets that the policy was a “de facto windfall tax”, with Ed Miliband, the shadow climate and net zero secretary, telling the Guardian: “After months of telling the country they were utterly opposed to the principle of a windfall tax, they have been dragged kicking and screaming to implement it.”

While the details of the new policy have not yet been announced, it’s true that on the surface the new approach appears very similar to a windfall tax. However, there are also some distinctions which mean it’s different to previous examples of windfall taxes, which we’ll set out below. 

What is the government’s new policy proposal?

The government announced late on Tuesday evening that part of its Energy Prices Bill would include a new “temporary” policy called a Cost-Plus Revenue Limit to be introduced in England and Wales. 

The government says it is doing this as wholesale electricity prices are set by the most expensive form of generation—currently gas-fired generation. As gas prices are historically high, this means, according to the government, “low-carbon electricity generators are therefore benefiting from abnormally high prices, while consumers are having to pay significantly more for energy generated from renewables and nuclear, even though they often cost less to produce”. 

In response, the government intends to introduce a revenue limit, which will limit the amount of money companies generating electricity can make to an “appropriate revenue” from the start of 2023. A consultation on this is due to be launched shortly.

What is a windfall tax? 

The Institute for Government (IfG) think tank says the term 'windfall tax’ is usually used to describe a one-off tax on companies which are deemed by the government to have made unreasonably high profits through unusually favourable market conditions. 

This means that in the past they have often been retrospective, as the companies have already made huge profits and so the government has deemed it necessary to tax them further. 

Both Conservative and Labour governments have introduced windfall taxes in the past. In 1981, under Margaret Thatcher’s leadership, then-chancellor Geoffrey Howe introduced a one-off levy on high-street banks, while in the 1990s Labour included a windfall tax on privatised utility companies in their manifesto, which was enacted after they won the 1997 general election. 

In May this year, then-chancellor Rishi Sunak announced the Energy Profits Levy—a 25% tax on UK oil and gas profits on top of the existing 40% headline rate of tax, taking the combined rate of tax on profits to 65%. This was also widely reported as a windfall tax. 

Can the Cost-Plus Revenue Limit be called a windfall tax? 

Mr Rees-Mogg insisted the policy is not a windfall tax, telling Today presenter Mishal Husain: “It is not a windfall tax. It's clearly not a tax. It's nothing to do with the profits.” 

While details on how the policy will work are currently very vague, it does appear to differ from what would traditionally be considered a windfall tax in some ways. 

The first difference, Resolution Foundation senior economist Jonathan Marshall told Full Fact, is that a windfall tax would “generally be applied retroactively”, though Mr Sunak’s recent Energy Profits Levy was also forward-looking. 

Mr Marshall said: “While a tax purist would say a windfall tax would be retroactive-only—it will be applied after the event, after the period in which windfall profits are made—there is precedent of an additional tax band being put on going forward as well.” 

The second difference, as Mr Rees-Mogg referenced in his interview, is how the Cost-Plus Revenue limit would be levied. 

The government says the Cost-Plus Revenue Limit “differs from a windfall tax as it will be applied to excess revenues generators are receiving, as opposed to applying to all profits”.

Mr Marshall similarly told us: “A windfall tax would traditionally be levied on profits, so it would be like 'you have made too much money', whereas this is levied at the revenue level so it's like ‘your income, your revenue, your turnover is too high’ [...] To put something on revenue, to say 'your company can't earn more than this fixed amount', is, again, a slightly different approach to a traditional windfall tax.”  

However, he added: “These are very minor differences. They're roundabout ways of getting to the same impact, which is getting money from companies that made too much money into the state coffers, into the Treasury.”

This was echoed by Olly Bartrum, a senior economist at the IfG, who told Full Fact: “Some companies are making excess profits at the expense of consumers, the government is designing a policy to lay a claim on some of those excess profits, and use them to offset the cost of the energy package. That is what most people would understand by the term 'windfall tax'. 

“So it's completely fair to call it a de facto windfall tax. These small sort of differences in the mechanism, I think, are largely irrelevant for how the public will understand it. There's not really a sort of formal definition of a windfall tax anyway, and the exact mechanisms used to deliver windfall taxes in the past have varied.”

Full Fact has contacted BEIS and Mr Miliband’s office for comment. A BEIS spokesperson did not provide any further comment, directing us instead to the information already published by the government. 

Image courtesy of Karsten Würth