Wind farm and nuclear electricity could be exempt from windfall tax

He had previously suggested all profits from electricity generation could be hit, regardless of the source of the energy.

The move comes amid a row over the new levy announced by the Chancellor on oil and gas companies last month despite public opposition from a string of Cabinet ministers.

Any attempt to impose a windfall tax on further industries would be likely to result in significant opposition from Conservative MPs.

At the time of the announcement of the new tax on oil and gas firms, Mr Sunak revealed that the Treasury had begun “urgently evaluating the scale of these extraordinary profits” made by electricity generating companies on the basis that the prices they are paid are “linked not to the costs they incur in providing that electricity but rather to the price of natural gas, which is extraordinarily high right now”.

Government insiders claimed oil and gas producers were “only half the picture” when considering the profits some firms have made from rocketing prices following the Russian invasion of Ukraine.

But a Whitehall source said analysis of companies’ profits has shown a “wildly different picture” depending on the individual firm and source of energy.

Restricting a new tax to profits yielded from electricity generated by gas and coal would avoid “impacting sectors of the economy where we need hundreds of billions of pounds of investment”, the source added.

A government push to encourage firms to invest in “clean” energy sources such as nuclear and offshore wind farms has been under way to help the UK to meet its net zero target and reduce its reliance on energy imported from abroad.

On Saturday, Craig Mackinlay, who chairs the Net Zero Scrutiny Group of Tory backbenchers, said: “Any windfall tax on the broader energy industry, no matter the type of production, is just wrong.

“At a time of energy shortage and demands being made to extract more North Sea oil and gas and invest in net zero, additional tax will simply deter investment. Additional tax can never reduce prices, and I’m surprised such a basic economic concept is now lost on the Treasury.”

In a letter to Mr Sunak on May 25, trade bodies including RenewableUK, Energy UK and the Nuclear Industries Association set out concerns about “recent reports that electricity generation producers are being considered for inclusion in a potential windfall tax”.

They wrote: “A windfall tax would have a detrimental impact on investors in clean energy and it is a mechanism which fails to recognise the complexity of the generation market.”

One source involved in the discussions said: “I can’t see how a broad brush approach would work.”

Last month, before the announcement of the new levy on oil and gas firms, Kwasi Kwarteng, the Business Secretary, described windfall taxes as a “bad idea”.

He said: “I don’t believe in windfall taxes, because what you are taxing is investment in jobs, you are taxing investment in wealth creation, you’re taxing investment in new technologies such as hydrogen and carbon capture.

“We want to see more investment. We don’t want to see taxes which essentially act against any incentive to invest.”