The government has announced that it will introduce a windfall tax on low-carbon energy companies in a policy U-turn.

Last month the European Union announced a €140bn levy on firms and Liz Truss had faced growing pressure to follow suit, after repeatedly resisting calls to cap profits being generated by power companies.

TUC general secretary Frances O’Grady urged the prime minister and chancellor to clamp down on the profits generated by energy firms.

“The UK windfall tax is far too low,” O’Grady told The Independent. “The chancellor should set it at a much higher rate in his mini-Budget next week. Otherwise, he is leaving UK families to carry the cost of the energy bailout, while oil and gas giants get away with their profiteering.”

The government has now launched plans for a cap on revenues as part of a temporary “cost-plus revenue limit” for renewable and nuclear electricity generators in England and Wales.

The plans form part of the government’s new Energy Prices Bill, putting into law support for consumers with energy costs.

Why are wholesale energy prices continuing to rise?

Currently in the UK market, wholesale electricity prices are set by the most expensive form of generation – presently gas-fired generation, which are significantly higher in light of Russia’s invasion of Ukraine and what the UK government has described as “Putin’s subsequent weaponisation of gas supplies”. 

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.

What does the Energy Prices Bill introduce?

The Bill confirms the recently announced help for businesses with the rising cost of energy. Support will see a typical household pay £2,500 a year for energy, while businesses will be paying less than half of predicted wholesale costs this winter.

It also introduces new powers to help sever the link between high global gas prices and the cost of low-carbon electricity through a new temporary ‘cost-plus revenue limit’ in England and Wales. This will reduce the impact of unprecedented wholesale prices on consumers and the taxpayer by introducing a revenue limit, curbing the amount generators can make.

When will the new windfall tax on energy companies come into force?

The government says the precise mechanics of the cost-plus revenue limit will be subject to a consultation which will launch shortly, with the proposal expected to come into force from the start of 2023. 

In a statement, the government said the plan will “ensure consumers pay a fair price for low carbon energy and has the potential to save billions of pounds for British billpayers, while allowing generators to cover their costs, plus receive an appropriate revenue”.

The government noted that low-carbon energy firms do tend to have higher input costs (such as biomass and nuclear) and this is being considered as part of the policy design.

Business and Energy Secretary, Jacob Rees-Mogg, said: “Businesses and consumers across the UK should pay a fair price for energy. With prices spiralling as a result of Putin’s abhorrent invasion of Ukraine, the government is taking swift and decisive action.

“We have been working with low-carbon generators to find a solution that will ensure consumers are not paying significantly more for electricity generated from renewables and nuclear.

“That is why we have stepped in today with exceptional powers that will not only ensure vital support reaches households and businesses this winter but will transform the United Kingdom into a nation that offers secure, affordable and fairly-priced home-grown energy for all.”

Chancellor of the Exchequer, Kwasi Kwarteng, said: “Our actions will mean that energy bills for the typical household will be half what they would have been this winter.

“We are protecting people, holding down inflation and preventing Putin’s energy price hike from causing long term harm to our economy by supporting businesses.”