BRITAIN’S power generators have made £2 billion in windfall profits by passing on charges to customers under a scheme which was introduced to combat climate change.

They are charging customers for the notional cost of carbon credits – the right to emit greenhouse gases – even though the credits were given to them for free under the Europe-wide scheme.

Critics are now accusing the electricity companies of unfairly exploiting customers. Steve Smith, managing director of markets for Ofgem, the electricity regulator, said: “In essence rather than the polluter paying, the polluter is actually getting paid. It is a straight transfer [of cash] from customers to generators’ shareholders.”

Tim Yeo, the Conservative MP and chairman of the Commons environmental audit committee, said: “It is indefensible for the companies to do this. There is no possible economic or moral justification.”

It was always the government’s intention that some of the costs of carbon trading would be passed on to the consumer to make households use less energy. It was also intended that the power companies would be pressured into reinvesting their windfalls in building new, low-emission power stations or in renewable energy.

But the committee found that the sector is “broadly holding on to its profits rather than investing them in low carbon energy technology”.

Carbon trading, which will be expanded under government proposals published last month, was introduced in the European Union in 2005 as a mechanism to control pollution following the Kyoto accord on climate change. Under the scheme, companies such as power generators must obtain a carbon credit, effectively a permit to pollute, for each ton of carbon dioxide they pump into the atmosphere.

They can buy or sell the credits on the open market. But about 75% of the British power companies’ allocation was handed to them for free. The companies had to buy the remaining 25% or reduce their emissions.

Between 2005 and 2006, a number of British generators were given allocations worth substantial amounts of money. Based on an average price of £12 for a ton of carbon over the two years, RWE npower was given £369m worth, E.ON £466m, EDF £294m, Drax £356m, Keadby Generation £368m and Centrica £86m.

Point Carbon, a firm of City analysts which specialises in carbon trading, estimate this windfall is £2 billion for the whole industry in 2005 and 2006. Power companies in mainland Europe, especially in Germany and France, are also said to have made large windfall profits.

The decision to pass on costs contributed to a 72% rise in UK wholesale electricity prices during the first year of the scheme. Analysts warn that wholesale costs are now being passed on to householders. Last year the typical domestic electricity bill rose £53 to £338.

A spokeswoman for the Association of Electricity Producers (AEP), which represents British generators, said it was possible some companies had made an additional profit, but they did not consider it a windfall.

All the power companies contacted by The Sunday Times insisted they were investing far more money in green projects than they had ever received in carbon credits.

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