Government Advocates for Revisions in Capacity Market Scheme, Focusing on Energy Transition
In response to concerns about investment reduction in the energy sector, the UK government has proposed a new scheme, the Energy Security Investment Mechanism, to replace the existing measures. The phase 1 proposals will be implemented by amending the Capacity Market Rules and Electricity Capacity Regulations 2014.
The National Grid Electricity System Operator (ESO) is considering the reintroduction of the Demand Flexibility Services (DFS) scheme for the winter period 2023/24. This decision follows the ESO's prediction that there will be sufficient available capacity to meet demands, with a de-rated margin of 4.8 GW (around 8%). The consultation on the reintroduction of the DFS scheme will close on 17 July 2023.
In contrast to the Energy Profits Levy (EPL), which is primarily targeted at oil and gas companies, renewable electricity generators in the UK are not subject to a similar profits levy but instead benefit from policies like the Contracts for Difference (CfD) scheme, which provides financial support for low-carbon electricity generation. To help fund these renewable schemes, the government imposes the Energy Intensive Industries (EII) Levy on high electricity-consuming businesses.
The EPL, currently set to end in March 2028, imposes a 75% tax on North Sea oil and gas production and has raised around £2.8 billion. The levy is currently planned to be extended for two more years beyond its original end date, continuing at least until the end of 2027. This extension was explicitly noted in 2025 financial reports, such as Harbour Energy’s half-year results, which mentioned a deferred tax charge linked to the EPL’s extension.
Industry leaders like Serica’s CEO have called for more clarity on the EPL’s future and related fiscal policies, emphasizing the need for realistic and pragmatic government approaches to support domestic energy production and investment in hydrocarbons. The Energy Security Investment Mechanism will lower the tax rate to 40% if average oil and gas prices fall below specific thresholds for two consecutive quarters.
To shield businesses from excessive costs associated with the energy transition levies, the UK plans to implement the British Industrial Competitiveness Scheme from 2027. This scheme is set to support energy-intensive industries by easing the costs passed on from renewables support funding, and it is expected to be funded through public funds rather than increasing consumer bills or energy levies.
Renewable UK CEO, Dan McGrail, has called for a "double down on our efforts to support and accelerate offshore wind development" and for the government to incentivise manufacturing investment into the UK. Carbon Tracker, a financial think tank, reported that inadequate grid upgrades resulted in enough wasted wind generation to power one million homes in 2022. They emphasised the need to prioritise strategic investment in wind power infrastructure to support the government's plans to decarbonise generation by 2035.
The UK's offshore wind pipeline has seen an increase of over 6.6GW in the past year, nearing 100GW. By 2029, the UK's offshore wind capacity is predicted to reach around 40GW, just short of the government's 2030 goal of 50GW. The government estimates that the EPL has saved the typical household £1,500 by July 2023.
The proposals will be implemented in two phases: Phase 1 before the 2024 Capacity Market auctions, and Phase 2 at a later date. A plan to strengthen the non-delivery penalty regime by changing the penalty rate figure has been allocated to Phase 2 due to concerns about unintended consequences for energy supply. The Department for Energy Security & Net Zero (DESNZ) has published a response to proposals aimed at improving delivery assurance in the Capacity Market.
The UK government has announced plans to scrap the windfall tax on excessive oil and gas profits if prices return to pre-Ukraine war levels. The ESO has reported that it is continuing to monitor risks and has identified steps to mitigate such risks and build additional resilience. The proposals for the Energy Security Investment Mechanism and the extension of the EPL aim to provide a more stable and supportive environment for the energy sector, addressing stakeholder concerns and promoting investment in both fossil fuels and renewable energy.
- Despite the Energy Profits Levy (EPL) primarily affecting oil and gas companies, renewable electricity generators in the energy sector are supportive of government policies such as the Contracts for Difference (CfD) scheme, which offer financial support and promote investment in low-carbon electricity generation.
- In an attempt to incentivize manufacturing investment into the UK and accelerate offshore wind development, renewable energy leaders like Dan McGrail, CEO of Renewable UK, are advocating for a more supportive energy policy from the government that will double down on investments in this sector.
