Taxation (Energy and Vehicles) Bill
Tuesday 14th July 2026
(4 weeks, 1 day ago)
Lords ChamberTaxation (Energy and Vehicles) Act 2026 View all Taxation (Energy and Vehicles) Act 2026 Debates Read Hansard Text Watch Debate Read Debate Ministerial Extracts Amendment Paper: Committee of the whole House Amendments as at 1 July 2026 - (1 Jul 2026)
The Financial Secretary to the Treasury (Lord Livermore) (Lab)
My Lords, it is a pleasure to open the Second Reading debate on the Taxation (Energy and Vehicles) Bill. The measures contained in the Bill will support businesses across the UK as they deal with the immediate economic costs associated with the ongoing conflict in the Middle East. We did not start this conflict and we did not join it, but it is impacting our economy, including by putting pressure on energy markets and disrupting supply chains.
Despite these pressures, the latest economic data shows that the Government’s economic plan is working. Inflation last month held steady. Britain’s economy was the fastest growing in the G7 for the first quarter of this year. Borrowing is forecast to fall in every year of this Parliament and wages are continuing to rise.
However, as the Chancellor has said repeatedly, we must continue to be responsive to a changing world and responsible in the national interest. That is why we have taken action to support businesses and families, including by reducing VAT on summer activities from 20% to 5% and extending the 5p fuel duty cut until the end of the year, saving the average motorist £120 since last year. We have committed more than £50 million to help those struggling with the cost of heating oil. To support hauliers and farmers, we have cut red diesel by more than one-third until the end of this year. To help reduce costs for energy-intensive firms, we have expanded the British industry competitiveness scheme to more than 10,000 manufacturers. We are also providing targeted support to the chemicals and ceramics industries, protecting thousands of jobs and putting businesses on a secure footing for the long term.
The measures contained in this Bill go further to protect consumers and help firms deal with rising prices. It covers three areas: the energy generator levy, mileage rates and vehicle excise duty for heavy goods vehicles.
On the first measure, the electricity generator levy, the price of energy has risen since the war in Iran began, benefiting generators whose costs bear no relation to the price of gas. The Government’s objective is to ensure that those who benefit from these increased prices and volatility pay their fair share. That is why, in our first Budget, we extended and increased the energy profits levy. Last year, the Chancellor announced a new permanent windfall tax regime on oil and gas.
In April this year, we went further still by announcing an increase to the rate of the electricity generator levy and extending it beyond its original sunset date of 2028. The electricity generator levy recovers excess revenues made by generators that do not use gas when electricity prices are over a long-term average. To ensure that it does not disincentivise investment, any new investment since 22 November 2023 is exempt from the levy. The increase in the main rate of the levy from 45% to 55% is legislated for in this Bill. The extension will be legislated for separately. The Government will set out the fiscal impact of this increase at the Budget in the autumn, with the costing certified by the OBR in the usual way.
Raising the rate will help break the link between electricity and gas prices. Even though the UK is generating more electricity from sources such as nuclear and renewables, international gas prices still set the price of our electricity. This means that, when global gas prices spike, so do bills here in the UK.
By breaking the link between gas and electricity prices, we can help to insulate consumers from the volatility of future crises. The rise in the electricity generator levy will contribute to this by encouraging participation in the wholesale contracts for difference scheme. Currently, under a separate scheme known as contracts for difference, some electricity suppliers are guaranteed a stable, fixed price for the electricity that they produce. The new wholesale contracts for difference scheme will offer certain existing eligible generators that are not already signed up to contracts for difference the option to bid for a fixed price for the electricity that they generate.
Increasing the rate of the energy generator levy will therefore increase the appeal of a fixed rate under the new wholesale contracts for difference scheme, in turn helping to protect consumers from volatile gas-linked electricity prices. The Department for Energy Security and Net Zero will come forward later this year with a consultation on the wholesale contracts for difference scheme. The design of the post-2028 energy generator levy will be considered alongside this consultation.
The second measure contained in the Bill relates to mileage rates. As fuel prices have risen, so has the cost of filling up a car or van for those who drive for work. Despite this, mileage rates—the amount that workers are reimbursed for every mile they drive—have not changed since 2011. This has created a significant gap between the amount it costs to run and maintain a vehicle and the amount that workers are reimbursed for.
In recognition of these pressures, the Chancellor has announced the largest ever increase to mileage rates and the first uprating in 15 years. As a result, mileage rates have now increased from 45p to 55p for the first 10,000 miles. Beyond 10,000 miles, the rate will remain at 25p. This change will benefit employees using their own vehicle for work and those who are self-employed and use simplified expenses rates.
The increase came into effect on 6 April and the legislation before us gives statutory effect to this change. Overall, the increased rate will benefit around 2 million employees and 1 million self-employed individuals, saving over £120 a year for a worker doing 6,000 business miles.
Although employers are not required to reimburse at the new rates set out, if employees are reimbursed below the tax-free rate they can claim mileage allowance tax relief directly from HMRC. More widely, in March, the Chancellor announced a review of mileage rates as a whole. This review is ongoing and will inform the Budget this autumn.
The third measure in the Bill concerns vehicle excise duty on heavy goods vehicles. The road haulage sector plays a vital role transporting goods across the UK, but haulage firms are disproportionally exposed to higher fuel costs. That is why we are providing additional targeted support for the sector through the Bill, with a 12-month holiday from vehicle excise duty for the majority of heavy goods vehicles.
Eligible vehicles renewing their VED in this period will pay a reduced annual rate of £1. This will save a typical HGV £600, and those with higher liability will, in some cases, save more than £900, on top of savings from fuel duty. It will benefit around 46,000 UK-based road freight firms. Taken together with other freezes to fuel duty since the general election, the average HGV has saved over £2,000 compared with plans set out by the previous Government.
This Government have the right economic plan to deliver secure and resilient growth in a changing world, but as we have seen, including over recent days, the war in Iran continues to create uncertainty and volatility in the global economy, and therefore higher costs for businesses here in Britain. The Government have responded by providing immediate support to help with those additional costs, including through the measures contained in the Bill.
These measures will ensure that electricity generators that benefit from increased prices pay their fair share. They will support around 2 million employees and 1 million self-employed people who need to drive for work. They will deliver targeted help to the road haulage sector, ensuring that HGVs remain on the road to deliver food and other products to communities right across the country.
The Bill shows that, in the face of global pressures, the Government will continue to be responsive to a changing world and responsible in the national interest. I beg to move.
Baroness Neville-Rolfe (Con)
My Lords, this Bill is presented by the Government as a series of targeted measures designed to address a specific issue: the war in the Middle East. I thank the Minister for his full explanation. However, the truth is that what we are discussing is a series of sticking-plaster measures designed to curb some of the worst excesses of what can be described only as an economy seriously in trouble.
The current Government—and, indeed, the one that is to come under the leadership of Andy Burnham—face a deeply serious situation. Last week, the Office for Budget Responsibility warned in its Fiscal Risks and Sustainability report that, without action, public debt is set to move on to an unsustainable upward path in the near future.
A key finding is that early action to head off difficult fiscal outcomes is much less costly than late action. This is partly due to the sheer scale of our national debt. Last year the Government borrowed £129 billion, 80% of which was spent on debt interest in an increasingly jumpy bond market. The OBR estimates that an additional £28 billion a year will be needed to meet the Government’s critical pledge to spend 3.5% of GDP on defence. At the same time, spending on the state pension and on health is projected to rise sharply in the next few years —one of the reasons why I called for a cap on expenditure on pensions as a percentage of GDP in my independent review of the state pension age as long ago as 2022 and why I deplore the failure to hold a full House of Lords debate on the 10-year plan for the NHS.
The Lords Economic Affairs Committee said much the same about the unsustainability of debt years ago in its report National Debt: It’s Time for Tough Decisions. The then chair, my noble and far-sighted friend Lord Bridges of Headley, was quoted at the time as saying that
“our national debt risks developing on an unsustainable path”.
Moreover, we are now spending more on welfare, £334 billion, than we collect in income tax, £331 billion. The new Prime Minister and Chancellor of the Exchequer face the choice of either significant tax rises or deep spending restraint if we are to stop debt spiralling further out of control. Yet the OBR has also made clear that tax rises cannot simply be treated as a limitless answer. Continually increasing taxes risks creating ever greater economic distortions, with the Laffer curve biting into receipts—for example, if the top rate of income tax goes up. Wealth taxes raise less than expected, as we know from overseas experience, and they certainly damage competitiveness. Further stealth taxes on earnings risk weakening work incentives and drag more people out of the labour market.
The key to squaring the circle, as I have discussed with the Minister on many occasions, is growth, particularly per capita growth or higher productivity. EU growth has been sluggish. Yet the Government want to get closer to the EU and agree to a package of changes that will certainly cost hundreds of millions a year, given the difficulties of negotiating with the EU, with no certainty that it will improve our economy to the extent hoped. I am also concerned about the impact on our legally binding obligations under CPTPP and our agreements with the US, particularly on vehicles, which I will come to later, and on pharma—agreements that are vital to UK growth. What is the nature of the legal advice that the Government are relying on in saying that they will continue to deliver such international obligations once a revised TCA is agreed?
The Government’s assault on business—rises in national insurance, business rates, and dividend and capital taxes, and the Employment Rights Act—is already having exactly the effect on business that we forecast, with employment squeezed and a crash in economic optimism and enterprise. A report this week from accountants BDO showed that business activity dropped sharply last month after a brief rebound earlier this year ran out of steam. The truth is that there is a deeply serious situation facing Mr Burnham, and we cannot divorce our discussions today from this backdrop.
That brings me on to today’s Bill. Increasing mileage payments to 55p for the first 10,000 business miles is a measure we support. It is right that workers who use their own vehicles for work, including carers, should not be left to absorb rising motoring costs. I know that the announcement was the early fruit of an ongoing review, as the Minister explained, but can he tell us about the logic behind the difference in treatment for hard-working carers and others who drive more than 10,000 miles a year?
I turn to the HGV excise duty holiday. HGV duty had been frozen since 2014 until Labour came into office. While reducing it to £1 for a year will provide some welcome relief to the sector, it does not solve the problem, and Ministers should not overstate the impact. More than 95% of road haulage firms are small businesses operating on tight margins. The Government say the measure will save around £600 for a typical lorry and £900 for the largest vehicles, yet, to put it into context, filling a single HGV at peak prices can cost more than £1,000. This does not offset the wider pressures that the Government have imposed through higher business rates, transport taxes and fuel duty, with duty and VAT receipts of course rising whenever petrol prices spike. If the Government are serious about supporting businesses in this country, and particularly small businesses, they must consider this policy as one of a series of changes they must make to create a tax and economic environment that backs business, especially small business, rather than penalising it.
I turn now to the electricity generator levy. This was introduced under the last Government as a temporary windfall tax and a short-term response to exceptional circumstances. It was due to end in 2028. However, we now see the Government proposing to increase the rate from 45% to 55% and to extend it beyond 2028 with no end date. The case put forward by the Government is that the increased rates will support the decoupling of gas prices by incentivising generators into voluntary wholesale contracts for difference. However, while the new higher levy applies from today, those new contracts are yet to be seen. I believe the proposed strike price is not known. The likelihood of generators accepting them is therefore unknown and in question, and the value for money for taxpayers is yet to be proven.
Moreover, the HMRC impact note for this Bill contains no figures for the Exchequer impact. We should have that, ideally now or at least during the consultations that the Minister referred to. Rather than acting to lower energy costs by taking sensible steps to increase the supply of energy, such as utilising our resources in the North Sea and moving forward with Jackdaw and Rosebank, the Government seem to be using tax as a long-term lever to alter the incentives faced by generators.
We introduced a short-term, emergency measure with a clear sunset date. Sunsetting is a responsible approach to temporary taxation and short-term regulation, and I think it can be very useful. It helps to avoid the accumulation of too much regulation, and I know the Minister worries about unjustified accumulation because it can have an adverse effect on productivity. Sunsetting has the merit of allowing periodic parliamentary scrutiny and of encouraging officials to think creatively about other routes to a desired end. Instead, the Government appear to be moving to a long-term, final answer when the relevant contracts for difference parameters are unknown and untested.
Before the Minister asks, as he sometimes does, what we would do, the Official Opposition have been clear that we would cut bills for businesses and consumers through our cheaper energy plan. We would take VAT off energy bills, axe the carbon tax and legacy subsidies, and again use our resources in the North Sea as the Norwegians are doing. Tax cannot and should not be the long-term solution to the problem of affordable energy.
At this juncture I might remind the Minister of the OBR’s warning. It also agrees that tax cannot be the solution to all this. As we can see on page 81 of its report, there is a significant fiscal cost to the commitment to reduce carbon emissions to net zero by 2050 due to the loss of revenues linked to such emissions. This is particularly true of fuel duty, with three-quarters of the decline in revenue due to the transition to electric vehicles. This is a good example of the difficulties the Government face in relying so heavily on taxation to finance spending.
This Bill contains measures that in isolation are not without merit, but they must be seen for what they are: limited interventions against a backdrop of rising costs, weakening confidence and increasingly strained public finances. Temporary relief has its place but is no substitute for a serious growth strategy, a competitive tax system, disciplined public spending and an energy policy that brings costs down by increasing supply rather than by reaching for higher taxes. That is the test by which this Bill should be judged.
Lord Redwood (Con)
My Lords, I fully support my noble friend Lady Neville-Rolfe in her general statement about what needs to be done and in her specific criticisms and support for measures in this Bill. It is right that the best way out of the financial hole the Government find themselves in again is by growth. That is a cross-party idea on which we all agree.
Unfortunately, this Government have one main hope, which is that a closer relationship with the EU and taking more EU laws into our system will give them extra growth, whereas all the evidence of the past shows the opposite. Our growth rate halved when we were in the EEC compared with 20 years before we joined it, because of the damage that laws and extra taxes did to our economy after we signed up to first the customs union and then the complete single market. If we look at the leaks and possibilities around the reset, it is practically all cost and no benefit—it is Britain giving in and becoming a rule taker. The rules will be more restrictive on some of our industries that were beginning to benefit from not having to take on all the extra rules that the EU has been legislating. There will be a considerable financial bill with the extra costs of Erasmus, the administrative levies, maybe a solidarity levy and the loss of £6 billion of fish over a 12-year period. I am afraid the Government will not find growth there.
We are today focusing on this set of three limited measures. Like my noble friend, I think two of them are modestly beneficial. It seems perfectly reasonable to increase the mileage allowances given the way that costs have gone over recent years. The previous Government had not done it, and therefore it is perfectly welcome. It is also helpful to a haulage industry in great distress—because volumes are not ideal and because wage, tax and, above all, energy costs have gone up—to be given some relief, though the Government have chosen a rather modest form of relief in this VED reduction.
I have two criticisms. First, I am not sure that a year is the right period. I do not think we can guarantee that, miraculously, in a year’s time, other costs will reduce and they will not need this help any more. It would have been wiser to keep it open-ended to see what happens, particularly to energy costs. It is also concentrated on the heavier, bigger end of the commercial fleet. There are a lot of other businesses, particularly small businesses, struggling with the cost of smaller vehicles where there is no help offered. That is a pity, and it would be good if the Government looked again at the full range of businesses and the question of duration, because it may be that this judgment, while helpful, does not go far enough and is not over the right time period.
The biggest item, which I object to quite strongly, is the generator levy. It is quite true, as the Minister pointed out, that this was first introduced by the previous Government. I liked it no more then than I like it now; I made critical remarks to Ministers and tried to get them not to do it. If you are going to impose a windfall tax, it should be a genuine windfall tax geared to a level of price or profit that you have decided to designate as windfall. What has happened is that the last Government and now this one have built this windfall tax into all their Budgets as a regular feature, regardless of what the regional price of oil and gas turns out to be in the months or years ahead. It would be much more convincing as a windfall measure if it were geared to a price target and/or a profit target, came in and was fiercer when there was genuine windfall profit and dropped out as soon as there was not. The Minister will know, observing world markets, that with the continuing uncertainty created by the Ukraine war and the war in the Middle East, we are seeing pretty big volatile swings, particularly in oil prices. That will make a huge difference to the profitability of the businesses being taxed through windfall taxes. I would like the Government to think again about the whole principle of windfall taxation. If they want a windfall tax, it should be targeted and very clearly based on genuine windfall profits.
I have one further worry about the Government’s strategy over energy, which is illustrated by the tinkering measures in this legislation. They have gone in favour of very dear energy, with very high carbon taxes, emissions trading taxes and general impositions—fuel duties and all the rest of it. They say that they have net-zero reasons for this, but I think they also have revenue-raising reasons. They see it as one of the easiest ways forward without violating the central manifesto pledges. Now they realise, correctly, that they are overdoing it. With all the tax, the cost of energy is extreme. This country has a particularly virulent case of it, which is making us uncompetitive and losing us jobs and business, and therefore other tax revenues. So now the Government are in the business of finding ways of parcelling out modest subsidies or rebates on this excessive taxation in the hope that they will see them through and enable them to keep some business going.
I fear that the Government should come to the conclusion that they are not giving enough back to enough businesses and people. If Ministers look out there in the marketplace, they will see jobs being cancelled or lost, vacancies not becoming available, turnover not growing and profits turning into losses. There are factory closures coming through in all the high energy-using areas that we have talked about before, and the closure of oil and gas is having knock-on effects for refining and petrochemicals. We are seeing an industrial collapse mainly led and generated by excessively expensive energy. Offering a few bits back will not solve the problem.
I am glad the Government have now expanded the number of businesses that will get some kind of energy rebate to 10,000, but that is by no means all the businesses out there that are suffering badly from dear energy. They are not offering enough back because they are taking lumps out. They also wish to make it worse by joining the even more expensive EU carbon trading and emissions trading schemes, and introducing the CBAM to catch anybody who dares import higher energy-using products. I ask them please to think again. I want them to succeed in creating more jobs, promoting growth and getting investment and incomes up. This will do the opposite; dear energy is a killer.
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.
Lord Fuller (Con)
My Lords, my contribution is in two parts. Briefly, it is about time that the mileage rates went up to 55p. It reflects the obvious truth that the cost of getting about has become more expensive. These real costs must be covered, so I welcome this measure, in so far as it goes, but observe that it would have been much better had the rates been indexed for future years so as to avoid these cliff-edge effects. I also welcome the support for our hard-working lorry drivers. I know from personal experience, when I used to run trucks myself, how hard it is to make a living from road transport. In fact, we paid £1 million of tax per year on 40 vehicles before paying a single penny in corporation tax. The taxman has the first pull on the road.
I turn to the electricity generator levy. This is just another line in taxes, fees, charges and levies that have taken the aggregate burden of taxation to new highs, and which press down on our economy and squeeze the dynamism from it. Labour thinks it is going to tax the generators, but, as we all know, these levies work through, and are borne by, the consumer, so the Bill is adding another layer to the cost of living.
Last week, the lights nearly went out. For the third time this summer, NESO broke the glass to plead for generators to supply more electricity—any electricity, at any price. NESO has never had to ask for a margin in the summer before. On Friday last week, the Times reported that Britain was “close to blackouts”, and that the scale of the crisis “was hidden”. Let us shine a light on that. The Times reported that staff at NESO allege that, for “multiple periods” on 23 June,
“the grid fell outside safe operating limits … At the time the grid was using all possible supplies of power to meet demand, meaning that if any of these had failed it would have triggered an automatic system shutdown causing power cuts across the country”.
There have been other cases since.
The Government’s impact assessment of the Bill says it is
“not expected to have any significant macroeconomic impacts”.
All the boxes where the fiscal assessments would normally be written are empty. GOV.UK tells us that the
“Exchequer Secretary to the Treasury, has read this … information and … given the available evidence”
concludes that
“it represents a reasonable view of the likely costs, benefits and impacts of the measure”.
As Britain sweltered, it turned out that 420 of our critical cool-chain food warehouses, which store half our nation’s food, could barely keep their contents cool enough. In Spain, when the lights went out, people on life-support machines died. Last week, if it were not for the kindness of strangers in France, the lights would have gone out. If we meet France in the World Cup in five days’ time, who knows what will happen? Is this the impact the Exchequer Secretary had in mind?
Labour has brought us a grid that is demonstrably more fragile, wholly less reliable and significantly more expensive. It has brought our manufacturing economy to its knees with the world’s highest electricity prices, and this measure will make them more expensive still. We might have expected a margin call in January, when short day lengths and low winds combined with high demand for heating can cause a shock. That is expected, planned for and avoided. However, we do not expect that in the summer, when we are told that solar panels will make us more energy secure.
This measure will have significant unintended consequences beyond jacking up prices. Quite simply, it will make the cost of generating electricity more expensive. That will harm the investment case for building new power stations, so we will become even more reliant on the kindness of strangers. The reason we have high prices is that supply is constrained. We have reduced the competitive tension in the market with an overfocus on renewables. The truth is that this measure will harm the generating fleet replacement of our power stations as they wear out. The hard truth is that, when the person in the NESO control room presses the button, we need energy generators to supply electricity. There is nothing wrong with having power stations ticking over that are available to leap into action when, if the price is high enough, the call to action is given. That is how the market works. In these moments, given a choice between having the lights go out or paying through the nose, we need to pay up and look big. However, when we are in that hole and need these people to jump to attention, increasing the levy from 45% to 55% is biting the hand that feeds us at the very moment we are in greatest peril.
This generator levy reduces the incentive for companies to participate in the break-glass market unless we accept that the wholesale price is driven higher still. I can hardly believe what I am about to say, because I agree with the noble Lord, Lord Sikka, that the way to fix the energy market is not to have even more levies. It needs reform, because crowd-pleasing price caps and rent caps such as this will never work. We need reform of the energy market to break the link with gas, but this is not the way to do it.
Disincentivising the replacement of our power stations is going to lead to something worse and wholly more sinister. There are special types of power station that must be spread throughout the grid for it to function properly. These power stations provide grid frequency stabilisation and ensure that power matches electricity supply with the right frequency, tightly controlled around 50 hertz. In fact, keeping within 1% of that 50 hertz figure is a legal obligation for NESO, otherwise we all get contagious blackouts and equipment damage, so these inertial power stations have special value, value that must be paid for and that is perversely bought within the scope of this measure.
We have a structural risk on our grid in that there are only two of these special power stations north of the River Humber. Both are scheduled for closure and none for replacement. With more levies, there are fewer incentives to build their replacements, so the Bill is laying the structural framework for the entirety of the electricity grid in our nation, which extends to Ireland, but especially in the north of England and Scotland, to fail, by disincentivising the replacement of the special power stations that maintain the frequency and protect our economy.
Perhaps the Minister should have a word with the Exchequer Secretary to the Treasury, in the few days he remains in post, to explain that there are, after all, plenty of consequences to the Bill. In the meantime, this is where Labour’s ignorant energy fundamentalism has brought us. It is not that the lights normally go out under Labour; it is that this Government are legislating to ensure that they do.
Earl Russell (LD)
My Lords, we on these Benches broadly support this Bill. It contains three sensible if modest measures responding to the real pressures households and business face because of the ongoing conflict in the Middle East, and we will not oppose them. Our wish is for the Government to do more to protect the public and the economy from the impacts of this continuing conflict, and to see that these measures are monitored, reviewed and reported on.
I note that the fragile ceasefire, which many had hoped would bring stability to the region, has now completely broken down again. We have now had three days of American attacks on Iran; Iran has struck numerous tankers in the strait; and Trump is now talking of imposing a toll on all ships exiting the strait. The cost of oil has shot up again overnight, so this conflict is far from over, and its consequences for the UK, in terms of energy prices, fuel costs and the cost of living, will continue to be felt for some considerable time. I seek reassurance from the Minister that today’s measures must not and will not be the limit of the Government’s ambitions. They are welcome but they are minor in scale.
This Bill does little to bring down the underlying cost of energy, particularly electricity, which remains stubbornly and unreasonably high. In brief, the Bill’s three measures are an increase in the electricity generator levy from 45% to 55%, targeted at exceptional returns when wholesale prices spike; an increase in the approved mileage allowance rate from 45p to 55p per mile for the first 10,000 miles, backdated to the start of this year; and a 12-month vehicle excise duty, or VED, holiday for most heavy goods vehicles renewing their licence between 1 July 2026 and 30 June 2027, reducing their liability to a nominal £1.
On the mileage rate, I echo the point made by my honourable friend the Member for St Albans in the other place that this increase is long overdue, and it will particularly benefit those who work in the care sector. What steps will the Government take to ensure that care workers are made aware of it?
On the vehicle excise duty, hauliers have understandably welcomed the relief, and we support it. Given that the conflict’s impacts represent ongoing costs beyond the 12 months, why did the Government not consider giving themselves the power in this legislation to extend the holiday for a further year without the need to bring back further primary legislation? What confidence do the Government have that this relief will be passed through to consumers rather than absorbed elsewhere in the supply chain? The public would rightly be concerned if haulage costs continued to rise. What monitoring is planned? And will this be reported at least by the Autumn Budget, or is there an option to do that sooner?
On the electricity generator levy, we have long argued for exactly this kind of decoupling of electricity prices from volatile gas prices that this increase is said to encourage, and we support that objective—although we do not feel that this measure alone is capable of doing that. Can the Minister assure the House that this levy increase will not undermine those ambitions?
The levy increase is in effect the stick to the carrot of longer-term contracts, and the interaction between these two policies is quite a complex matter. How will the Government keep the overall objective under further scrutiny? A higher rate is only a proxy for the real goal of moving legacy generators off spot price exposure and on to newer fixed-term contracts for difference.
I would be grateful if the Minister could set out how progress on the actual migration to CfDs will be monitored and reported. Without that information, it is quite difficult for Parliament to make a determination on how this wider policy objective has been achieved. More broadly, will the Minister confirm that, should the conflict continue, the Government will bring forward further measures as needed and keep both Houses updated?
We support this Bill, but it needs to sit alongside a much wider set of proposals that we believe are required—indeed, many across the House have strayed beyond the measures in the Bill into broader areas. My party has called for a three-month, extendable emergency transport package to keep Britain moving, an immediate 10p cut in fuel duty, a cap on bus fares at £1, a 10% cut in rail fares and a reduction in VAT on public electricity charging. We have also set out a permanent essential energy guarantee, giving every household a discount on its energy use, with vulnerable and larger households receiving more. And we continue to press for the wider structural reforms that would genuinely bring down bills for good, such as an energy security bank offering low-interest loans for home energy improvements and reversing cuts to insulation programmes so that we can halve energy bills within a decade.
Can we expect serious and detailed plans to come in the energy independence Bill to make sure that the cost of our energy is reduced—particularly the cost of electricity, which, as I know the noble Lord is aware, we need to bring down so that we can get people on to EVs and heat pumps? The cost of electricity remains too high, the crisis in the Middle East is not resolved, and much remains to be done. Should the crisis continue and deepen, we stand ready to co-operate with Ministers and government to protect our citizens and our economy from the worst of its impacts.
Lord Altrincham (Con)
My Lords, I thank all noble Lords who have spoken in this debate and the Minister for his usual courtesy in hosting it and for his explanation of the rather undefined windfall tax that my noble friend talked about. In particular, I note the lively contributions of my noble friend Lord Fuller and the noble Lord, Lord Sikka, who both touched on the fraught areas of contracts for difference and high wind—perhaps the Minister could comment on that.
As we have discussed, the Bill contains some small and mainly useful welcome measures. The Government’s recognition that more must be done to support small businesses is also a step in the right direction. However, the difficulty we see is that, while such measures may have a place as emergency, short-term relief, as the previous Government recognised, they cannot form the basis of a sustainable, long-term economic strategy.
More widely, noble Lords will be aware that the interim report of the Timms review of disability benefits spending was published last week, and it showed that spending is forecast by the Department for Work and Pensions to rise to more than £41 billion by 2031 on that benefit alone. As my noble friend and other noble Lords have made clear, the Office for Budget Responsibility has warned that taxes will have to rise or spending will have to be cut if we are to avoid an unsustainable path for debt. The tax rises that this Government have already imposed are themselves becoming unsustainable: they are penalising businesses, tourists, publicans, workers and those who want to come to this country to generate wealth, investment and employment.
A more sensible approach would be to take steps to increase domestic energy supply from the North Sea, to support growth and to ensure that any tax reliefs are matched by credible reductions in spending. The Government’s net-zero approach has weakened our domestic energy industry and left us increasingly dependent on global supplies, including from countries that continue to support Russian oil. In the latest round of sanctions, the Government left open a loophole for Russian oil that is refined into diesel and jet fuel in third countries. Indeed, we are now in the extraordinary position of relying on adversaries, and on global supply chains shaped by them, to meet demand that we could and should meet through domestic energy production. That is bad for our economy and has led to a degree of industrial collapse, as noted by my noble friend Lord Redwood. It is bad for our energy security and our standing in the world.
What we need from this Government is a serious plan to address the underlying problem. Spending must be brought under control—and quickly—if we are to keep public finances within the bounds of sustainability. Welfare would seem an obvious place to start, but any new Government will need the political courage, discipline and authority to deliver reform at the scale required. The wider economic challenge facing the Government will become only more serious if this is the approach that the new Administration, under the incoming Prime Minister, take to the economy, energy security and fiscal policy.
Lord Livermore (Lab)
My Lords, it is a pleasure to close this Second Reading debate on the Taxation (Energy and Vehicles) Bill. I am very grateful to the select group of noble Lords for their contributions and questions.
The measures contained in the Bill will support businesses across the UK as they deal with the immediate economic costs associated with the ongoing conflict in the Middle East. We did not start this conflict and we did not join it, but it is impacting our economy, including by putting pressure on energy markets and disrupting supply chains. That is why, as the Chancellor has said repeatedly, we must continue to be responsive to a changing world and responsible in the national interest.
The noble Baroness, Lady Neville-Rolfe, once again unfortunately sought to talk down Britain’s economy, yet the latest economic data shows that inflation in the UK held steady while it rose in other comparable countries. The noble Baroness and the noble Lord, Lord Redwood, spoke about economic growth, but they did not mention that Britain’s economy was the fastest growing in the G7 for the first quarter of this year. The noble Baroness also spoke about debt borrowing being forecast to fall in every year of this Parliament.
The measures contained in the Bill cover three areas: the electricity generator levy, mileage rates and the vehicle excise duty for heavy goods vehicles. The noble Baroness seemed keen to talk about almost anything other than the measures contained in the Bill, but when she did focus on them, she said that they were just short-term measures, a point also made by the noble Earl, Lord Russell. I disagree; the measures contained in the Bill will provide important immediate support to families and businesses as they deal with the consequences of the war in the Middle East, including the largest ever uprating to mileage rates and a significant reduction in the vehicle excise duty for haulage firms. The increase to the electricity generator levy also forms part of a wider long-term strategy to delink gas from electricity prices, helping to shield consumers from the impact of volatile prices. However, as I set out in my opening speech, the measures form just one part of the wider support we are providing to households and businesses, and we stand ready to go further where necessary.
The noble Baroness also asked about North Sea oil and gas. She knows that I agree with her that North Sea oil and gas production is an important and valuable resource and its workforce is a vital asset to our country. That is why we are harnessing our domestic supply by managing existing fields for their entire lifetimes, including by allowing tie-backs for those fields to ensure that they remain viable.
The first measure in the Bill concerns the electricity generator levy. The price of energy has risen since the war in Iran began, benefiting generators whose costs bear no relation to the price of gas. The Government’s objective is to ensure that those who benefit from these increased prices and volatility pay their fair share. That is why we are delivering an increase to the rate of the electricity generator levy from 45% to 55% and extending it beyond its original sunset date of 2028. Raising the rate will ensure that a greater percentage of exceptional generator revenues is made available to support businesses and households, and it will help break the link between electricity and gas prices by encouraging participation in the new wholesale contracts for difference mechanism.
The noble Baroness asked about the end date. The Government plan to extend the electricity generator levy beyond 2028 to encourage participation in the new contracts for difference mechanism and therefore provide more certainty to firms by offering a fixed price for the electricity they produce. We will work closely with industry to design the post-2028 electricity generator levy regime. DESNZ is planning to publish a consultation on the new contracts for difference mechanism later this year. The design of the electricity generator levy will be considered alongside this consultation.
The noble Lord, Lord Redwood, criticised the Government’s energy policy overall. My noble friend Lord Whitehead set that out, in probably greater detail than I can, in answer to the noble Lord’s question in the previous debate today. As the noble Lord knows, in this country we are particularly exposed to volatile gas prices, not least because the previous Government failed to invest in renewables. We need to invest in an economy that is as low carbon and based as little on gas as possible. By delinking from gas, a key part of the measures contained in the Bill, we can help to separate the price of electricity from the volatile price of gas internationally.
The noble Lord, Lord Fuller, said that we would increase the cost of electricity, but I believe that helping to delink from gas will do the exact opposite. The noble Lord also said that these measures would disincentivise future investment. They clearly will not do that, because the electricity generator levy has strong protections for new investment after 2023, which is exempt from the levy. The electricity generator levy is levied only on legacy renewable generators who stand to make extraordinary profits when high gas prices set the wholesale price without any commensurate increase in costs.
The noble Baroness, Lady Neville-Rolfe, asked about the wholesale contracts for difference scheme. Businesses have welcomed the announcement of the scheme and the certainty that these contracts will provide them with for years to come. The chief executive of the CBI said:
“If implemented correctly, voluntary contracts for difference could reduce the impact of gas on retail electricity prices and ensure the benefits of clean power can be realised across the economy”.
It is right that we now work closely with businesses on the detail, which is why they will have the opportunity to respond to the consultation that DESNZ is planning to run later this year.
My noble friend Lord Sikka asked a series of questions, which I will look at in greater detail. I will write to him, if I am able to do so.
The second measure contained in the Bill relates to mileage rates. I am grateful to the noble Lords, Lord Redwood, Lord Fuller and Lord Altrincham, the noble Earl, Lord Russell, and the noble Baroness, Lady Neville-Rolfe, for their support for this measure. As fuel prices have risen so has the cost of filling up the car or van for those who drive to work. Despite that, mileage rates have not changed since 2011. In recognition of these pressures, the Chancellor has announced the largest ever increase to mileage rates and the first uprating in 15 years.
The noble Baroness asked how the Government determined these uprated rates. In determining them, the Government considered the need to respond to the effect of the war in the Middle East on fuel costs after a prolonged period with no change, while balancing support for individuals with overall fiscal responsibility. She asked about the 25p rate. Our objective has been to focus support where costs are highest. The vast majority of drivers travel fewer than 10,000 miles a year. The 25p rate above 10,000 miles reflects the fact that the marginal cost of driving falls as mileage increases, with fixed costs such as insurance, servicing and depreciation covered by the higher 55p rate. Petrol and diesel motorists, including those who use their own vehicle for work, will also benefit from the extension of the 5p fuel duty cut to the end of this year.
The noble Lord, Lord Fuller, mentioned indexation. The decision the Government have taken on mileage rates is a targeted response to current cost pressures. The review announced by the Chancellor in March will consider the rate beyond 2026-27. Annual indexation is not currently the Government’s policy. The Government have already committed to a review of these rates and will set that out at the Budget.
The noble Earl, Lord Russell, asked about communicating to care workers. As he may know, the trade union UNISON has warmly welcomed this measure. I believe that we will communicate actively to its members.
The third measure contained in the Bill is the vehicle excise duty on heavy goods vehicles. The road haulage sector plays a vital role in transporting goods across the UK, but haulage firms are disproportionately exposed to higher fuel costs. That is why we are providing additional targeted support for the sector through the Bill, with a 12-month holiday from vehicle exercise duty for the majority of heavy goods vehicles. The noble Earl, Lord Russell, also asked about the power to extend this measure further, beyond one year. That would be perfectly possible in future Finance Bills and would not require any additional primary legislation.
The noble Lord, Lord Redwood, asked about smaller vehicles, not just HGVs, being included in this. Van drivers, for example, will benefit from the decision we have taken to extend the 5p fuel duty cut to the end of this year. Those who use their own vehicle for work will also benefit from the mileage rates increase in the Bill; that includes the 163,000 van drivers who are currently estimated to be claiming simplified expenses. It is right, though, that the Government balance direct support for firms with overall fiscal responsibility. Extending these measures to vans would cost an estimated £1 billion to £1.5 billion a year, but we will continue to keep this issue under review.
The noble Baroness, Lady Neville-Rolfe, asked about the impact of other taxes. Typical HGVs will save £600, while HGVs with higher vehicle emissions will save £912. In total, the decision taken since the general election to freeze fuel duty will save the average HGV over £2,000, compared with the previous Government’s plans.
This Government have the right economic plan to deliver secure and resilient growth in a changing world. The war in Iran continues to create uncertainty and volatility in the global economy and, therefore, higher costs for businesses here in Britain. The Government have responded by providing immediate support to help with these additional costs, including through the measures contained in the Bill. The Bill shows that, in the face of global pressures, the Government will continue to be responsive to a changing world and responsible in the national interest.