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Energy Industry News

Government increases windfall tax on energy firms to 35%

The government has increased the windfall tax on oil and gas producers to 35%.

During the Autumn Statement on the 17th of November, chancellor Jeremy Hunt announced that the Energy Profits Levy will be increased from 25% to 35% and extended to the end of March 2028.

He also confirmed that a new, temporary 45% Electricity Generator Levy will be applied on the “extraordinary returns” being made by electricity generators. The government said that the structure of the UK’s energy market means high oil and gas prices are driving up the cost of otherwise cheap low-carbon electricity in the UK. The new Levy will help fund government support for energy bills and public services.

During the Budget, Hunt said: “I have no objection to windfall taxes if they are genuinely about windfall profits caused by unexpected increases in energy prices.

“But any such tax should be temporary, not deter investment and recognise the cyclical nature of many energy businesses.”

Together, the new taxes are expected to raise an extra £14bn for the government.

The government will also consult stakeholders over the coming months as part of a review of the UK’s long-term tax treatment of the North Sea after the Energy Profits Levy ceases, to ensure the regime delivers certainty and supports the country’s energy security.

Hunt added: “Over the long term, there is only one way to stop ourselves being at the mercy of international gas prices: energy independence combined with energy efficiency.”

Hunt said that recent energy price increases have made the country “unavoidably worse off”, with the UK now expected to spend the equivalent of 8% of GDP on energy (£190 billion) compared to 2% (£40 billion) prior to the pandemic.

Discussing the new windfall taxes, Tom Gilby, equity research analyst at Quilter Cheviot, commented: “Low carbon electricity generators are now firmly in the crosshairs for the government with the introduction of a 45% windfall tax. This recognises that they have so far gone under the radar in being beneficiaries of rising energy prices along with a stable cost base. 

“Some energy generators, such as SSE, have been more vocal than their oil and gas counterparts in protesting against a windfall tax and the impact it could have on investment, but this was always likely to fall on deaf ears for as long as extraordinary profits were made in this cost of living crisis. The headline rate of 45% appears harsher than the one on the oil and gas producers at first glance and they could feel hard done by given the level of investment in clean energy and the lack of share buybacks. However, there is a nuance here in that it is on profits over a certain level as it tries to keep some semblance of an innovative industry. It remains to be seen how much of this investment will ultimately be threatened, but with this windfall tax landing at the same time as interest rates and inflation raising the cost of funding new projects, it could be more detrimental than when first designed.

“The government does need to be careful here that it does not choke off any of the transition to clean energy. Hunt spoke of the importance of energy independence via clean energy sources and thus the impact of this windfall tax will need to be monitored closely, otherwise the transition to net zero could be put in doubt.”

During the Autumn Statement, Jeremy Hunt also outlined what support would be available to households and businesses struggling with rising energy bills after April 2023.

Hunt announced that targeted support will remain in place for the most vulnerable, but that bills are expected to rise further next year.

The government is shortly expected to announce new targeted support for businesses from next April. As the previous Energy Price Guarantee for households was matched for businesses, the support is likely to be less generous and for those who are the most vulnerable to rising prices.

Hunt previously confirmed that any support for businesses “will be targeted to those most affected” and that the new approach will better incentivise energy efficiency.


Dan Serghi

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