Proposed EU Windfall Tax May Hit Clean Power

As European policymakers mull windfall taxes on "excess" energy profits, clean-energy producers could be hit harder than fossil fuel-focused peers because of their differing cost structures. At a time when the European Union (EU) is struggling to meet net-zero commitments, one potential side effect of windfall taxes could be to discourage clean-power investments such as wind, solar and battery storage.

Windfall taxes may impair EU clean-power investment

The implementation of windfall taxes on low-carbon and fossil-fuel power generators is being considered after both industries benefitted from the increase in wholesale gas prices. This may especially affect profits of wind, solar, hydropower and nuclear generators. Higher gas prices have driven a 10-fold increase in wholesale electricity prices, giving low-carbon power generators a revenue boost without any associated increase in input costs.

By contrast, electricity producers that have a higher share of coal, gas and oil-fired power in their power output and revenues may be less impacted by windfall taxes. These technologies have higher marginal costs and lower profit margins. The risk of extra taxes for regulated power and gas grid operators is also low as their revenues are not directly affected by rising energy prices.

Lengthy permitting processes and supply-chain bottlenecks have already slowed the deployment of clean-power capacity. If EU policymakers adopt a lower cap on electricity prices for low-carbon generators (versus fossil-fuel-based power plants), it could further limit long-term investment in clean power and undermine the EU’s net-zero commitment.