Taxation (Energy and Vehicles) Bill

Lord Sikka Excerpts

2nd reading & Committee negatived & 3rd reading
Tuesday 14th July 2026 Lords Chamber

[Lord Sikka (Lab)]

My Lords, I will confine my comments to Clause 1, which will increase the rate of the electricity generator levy from 45% to 55%. I fully support this increase and wish it had been higher.

Despite various initiatives mentioned by the Minister, Ofgem’s marginal pricing system remains fundamentally flawed. It ultimately determines consumer prices and, in the process, showers profits on companies generating electricity. The Ofgem cap is not based on average cost or a weighted average cost of all the inputs, or indeed on any notion of actual cost. One of Ofgem’s objectives is to ensure profit for each supplier at each stage—at generation, transmission, distribution and retail. This means that the Ofgem cap is set at the most expensive price or cost per unit, otherwise the marginal producer—the most expensive producer—cannot make a profit. This is the reverse of what happens in competitive markets, where the most expensive producer is driven out of business.

Ofgem’s pricing formula is a boon for companies generating electricity from oil, nuclear, renewables, solar, wind, hydro and other forms of inputs, because they are paid the price of electricity produced from gas, which is usually the most expensive input. The Bill does not reform Ofgem’s pricing formula. It does not fully decouple the price of gas-produced electricity from the rest. Instead, it takes a little more in excess profits via the levy. Even with a 55% levy, electricity generators will still be able to keep 45% of the excess profits manufactured by a flawed Ofgem formula. They have already kept billions in excess profits. What is the excuse for letting them keep still more?

The Government’s rationale is that the revenues resulting from this Bill will help to subsidise some businesses and households. But it will not help all households and all businesses and it does not provide long-term relief from profiteering by energy companies. A study by Unite reported that, since the pandemic, electricity and gas supply companies have increased their profit margins by 363%, and electricity generation companies have increased their profit margins by 198%. But successive Governments and Ofgem have made no attempt to reduce the profit margins of electricity generators. I hope the Minister will comment on this.

Can he also explain why Ofgem’s marginal pricing system has not been abandoned and why the price of gas-produced electricity has not been fully decoupled from the rest? Can he explain how much excess profit has been facilitated by Ofgem’s pricing formula and what proportion has been or will be recovered by the electricity generator levy?

It is worth noting that returns to energy investors are much higher because of flawed UK tax laws. I will provide some background before the detail. The background statistics are that 80% of UK offshore wind generation is foreign owned. The largest onshore wind farm in Wales is owned by a Swedish entity, EDF is 100% owned from France, E.ON is based in Germany and Scottish Power is owned by a Spanish multinational. The shareholders of their UK operations, mostly based abroad, receive billions in dividends without deduction of tax at source. In other words, they pay no tax whatever on those dividends. This results in huge loss of tax revenues that could help the Government to increase support for energy customers. Countries such as the US, Australia and Sweden deduct a withholding tax at source on dividends paid to foreign investors. They make a distinction between investors resident in tax- treaty countries, EU countries and non-co-operative tax havens. Can the Minister explain why the Government do not do the same and why they are content to forgo billions in tax revenues by not having a withholding tax?

I am also concerned about the lack of good energy infrastructure. Since privatisation, National Grid has paid £28 billion in dividends, plus millions more in share buybacks, but we do not actually have a good energy infrastructure. This is similar to the woes of the water industry. This week, it has been reported that Britain’s biggest community solar project has been forced to shut for the duration of its first summer by the Government’s energy system operator to avoid overloading the local grid with renewable energy. During periods of high wind, the Government pay companies up to £180,000 an hour to switch off wind turbines. At the same time, gas plants are paid extra to produce more electricity to balance the system and meet demand. For the period September 2021 to April 2025, the cost of balancing the electricity grid came to £11.8 billion and it is expected to hit £8 billion a year by 2030. Can the Minister explain why, after 36 years of privatisation, National Grid and other energy companies are not penalised for failing to provide a good and reliable electricity transmission and storage system? I look forward to hearing the Minister’s reply.