Always wait for the small print with windfall taxes. Shares in the quoted electricity generators – the likes of Centrica, Drax and SSE – fell for about half an hour as the chancellor announced in the House a stiff-sounding windfall tax. Then prices rebounded – plus a bit – as the details of the scheme emerged to reveal that Jeremy Hunt had been far less severe than he could have been.
“A very reasonable outcome,” commented Bernstein’s analysts, looking through the lens of companies and investors. You bet: while promising to raise £14bn from generators out to 2028, Hunt left several billion on the table.
The first critical detail was the definition of generators’ “extraordinary” profits – the part to which the new 45% levy will apply. It references revenues above £75 per megawatt-hour, whereas investors were braced for a figure closer to £60. By the close of trading, the biggest gainer in the FTSE 100 index was British Gas owner Centrica, which made its best decision in years when it decided to retain, rather try to flog, its 20% stake in the UK’s existing fleet of nuclear power stations last year.
Those ageing nuclear plants, with largely fixed costs, are a supremely lucrative asset to own while sky-high gas prices are dictating the wholesale price of electricity. Therein lies the unanswerable case for a levy on generators to go alongside the one on North Sea producers: nuclear, renewables and biomass firms (or those not on contracts-for-difference arrangements) are enjoying massively outsized returns versus their investment risk thanks to a “made-in-Russia energy crisis”, as Hunt put it.
And the second important detail was that gas-fired power stations have been excluded from the levy. Consider that decision a lobbying victory for the SSE and Drax, a duo with significant gas-fired portfolios. Their plea that riskier “flexible” generating capacity should be spared has prevailed, even though gas-fired stations are themselves enjoying a surge in profit margins that could equally be called extraordinary.
Drax still gets whacked on its biomass side, but the escape for its gas-fired assets sent its share price from 550p to 600p in no time. Scottish Power, which sold its stations to Drax in 2018 to concentrate on wind and solar, grumbled about “a recession made by gas, but a recovery to be paid for by renewables”. It’s a fair point.
On the plus side, Hunt has at least provided clarity. After six months of indecision in government, that was the minimum requirement, as argued here yesterday. The generators now know the rules. But let’s be clear: the windfall formula is tame.
What is going on with Bulb?
There was one hell of a footnote in the Office for Budget Responsibility’s analysis: “The total cost of the Bulb Energy bailout has reached £6.5bn”. Since the upper end of outsiders’ estimates was previously £4bn, the new figure requires an explanation, which the OBR unfortunately did not provide fully.
One must assume the government’s refusal to allow a nationalised Bulb to run a hedging programme on energy purchases is to blame. Bulb was left to buy for customers at spot prices in a rising market because the Treasury regards hedging instruments as too risky – or so Kwasi Kwarteng, when business secretary, said. If so, the Treasury’s stance was ridiculous. All energy suppliers hedge; it is how the industry works.
The National Audit Office is having a look at the less than transparent terms of the pending sale of Bulb to Octopus Energy. It should extend its inquiry to the government’s entire oversight of Bulb over the past 12 months. Nationalisation was never going to be costless, but £6.5bn – if that is a cash cost to the public purse – is scandalous. You could buy Centrica (market cap £5.1bn) for less.
High street reprieve
On business rates in England, Hunt did well. He pulled on all the main levers to give high streets some help: he froze the multiplier; he allowed firms with lower bills from property revaluations to enjoy the full benefit immediately by scrapping transitional caps; and he extended and increased relief for retail, hospitality and leisure firms.
The net effect will be a freeze, more or less, in government receipts from business rates next year. Within that overall picture, the retail sector is projected to pay 20% less, while large distribution warehouses are expected to pay 27% more. That is viewed as the alternative to an online sales tax.
Within the limitations of the complex business rates system, Hunt went as far he reasonably could. A few high street businesses may survive as a result. Yet Labour’s prescription for this clunky property-based charge still feels better: scrap it and design something more suited to the 21st century.
