Europe Increases Taxes On New Energy Companies

In early November 2022, executives from a number of new energy developers, including Orsted A/S, SSE Plc, RWE AG and Iberdrola SA, gathered at the Chancellor of the Exchequer's residence in the hope that the UK government would change its "windfall tax" policy on new energy, particularly wind power. Just a few days ago, the new Chancellor of the Exchequer, Jeremy Hunt, announced that the UK's "windfall tax" would apply to new energy generation, and that all income from new energy generation companies selling electricity for more than €75 per megawatt hour would be subject to a tax of up to 45%. This policy will be implemented from 1 January 2023.

Orsted A/S and SSE Plc are some of the largest offshore wind developers in Europe. The UK government's windfall tax will have a significant impact on their future revenues and they have protested against the government.

Windfall tax means "windfall" and is a tax used by the government to regulate excessive corporate income. The windfall tax has been around for over 30 years and was created in the UK during the Thatcher era.

The reason why the UK government has extended the scope of the windfall tax to new energy generation is that the energy crisis in Europe in 2022, triggered by the Russo-Ukrainian war, has caused electricity prices to soar and the general public can no longer afford the high cost of electricity. The government wants to pay back to the population by means of a tax.

According to Bloomberg data, the price of electricity in the UK was £0.21/kWh in October 2021, £0.28/kWh in April 2022, and by October 2022, it had risen to a staggering £0.52/kWh, an annual increase of 148%. Although the cost of electricity generation is also rising behind the scenes, electricity operators are the biggest beneficiaries of this energy crisis, while ordinary residents are the biggest victims.

In the UK, the common practice for new energy power development is to enter into medium to long-term subscription contracts with the government, where the government buys the electricity produced by the power companies at a fixed price, which is within a reasonable price range. Therefore, the sale of electricity under a subscription agreement would not be affected by the windfall tax, as it would not meet the criteria for windfall profits.

Instead, electricity that is traded in the market will be subject to strict regulation under the windfall tax. The UK, as the largest wind power producer in Europe, will pay a high wind tax on almost half of its electricity generated.

In addition to the UK, several countries in the European region will or have already imposed a "windfall tax" on new energy generation.

The German government has imposed a windfall profits tax on renewable energy generation since 1 December this year, with a 90% tax on electricity revenues above 130 euros/MWh.

In addition, Norway, Finland, the Netherlands, Italy and many other countries have for renewable energy generation "windfall profit tax" restriction policy.

In the shadow of the European electricity crisis, European governments are hoping to increase taxes to cover their fiscal deficits.

However, the heavy taxation is adding to the already difficult situation of the European new energy industry.

As the revenue of new energy plant developers decreases, there will be less investment in tenders, resulting in a decline in new energy installations in Europe.

Previously, the supply chain crisis and cumbersome government approval policies in Europe had already caused new energy companies a lot of grief.