Interest in a windfall tax on electricity generation companies has re-emerged after industry executives met the chancellor, Nadhim Zahawi, and the business secretary, Kwasi Kwarteng, on Thursday. The former chancellor Rishi Sunak introduced a windfall tax on North Sea oil and gas operators in May. Here, we examine the issue.
What is a windfall tax?
A windfall tax is a one-off levy on a sector that has made huge profits from something they were not responsible for. The government has imposed windfall taxes on industries before: in 1981, the then Conservative chancellor, Geoffrey Howe, levied the banks, arguing they had benefited from high interest rates. In 1997, the Labour chancellor, Gordon Brown, raised £5.2bn from a windfall tax on privatised utilities. The pressure is on energy and electricity companies to ease the cost of living crisis, with Brown having called for suppliers who cannot lower bills to be temporarily brought into public ownership.
What has been introduced?
Oil and gas prices have soared over the past year, notably since Russia’s invasion of Ukraine, triggering calls for companies in the sector to be taxed on their outsized profits. Labour originally argued that a one-off, year-long windfall levy could raise £1.2bn to fund discounts on home energy bills. After splits within the cabinet, Sunak launched the energy profits levy (EPL) in May. It could be in place until the end of December 2025 and is aimed at raising £5bn as part of a £15bn support package for households.
Who has been taxed?
The EPL not only encompassed well-known firms, such as BP and Shell, but also lesser-known ones, such as Harbour Energy, which actually produces more oil from the North Sea than any other UK extractor. After the EPL was announced, BP and Shell said it may affect their green investments, but a BP executive has since admitted the levy will have no impact. BP and Shell – and the British Gas owner, Centrica – have since reported huge profits, causing further anger.
Sunak had threatened to extend the tax to electricity generators, wiping billions from the value of their stock. However, he later cooled on the idea and Boris Johnson indicated the levy would not be introduced, triggering a partial recovery of the stock price. The average annual energy bill is now forecast to top £4,000 from January, bringing the government’s options for further support under the microscope.
Who are the electricity generators?
Britain has a diverse energy generation sector, including companies supplying power from gas- and coal-fired power plants, windfarms and nuclear stations. Centrica, ScottishPower and some others serve consumers directly, but many are focused on delivering power to retail suppliers. The biggest generators include SSE, E.ON, Ørsted and Drax, which runs a large eponymous power plant in North Yorkshire.
It has been estimated that taxing generators could raise between £3bn and £4bn. However, the industry argues some companies have not enjoyed the bumper profits made in the oil and gas industry because they sell the power they generate far in advance at lower prices, so have yet to benefit from the surge in energy prices experienced this year.
What is the government’s position?
Any action that requires legislation to be changed is not imminent, with parliament in recess and the Tory leadership race not concluding until 5 September. The government has committed to not make any big fiscal decisions until Johnson leaves Downing Street.
Ministers are rowing back from threatening energy companies with an even bigger windfall tax, after the Tory leadership candidate Liz Truss and her ally Kwarteng – who opposed the EPL – made plain they would not support this option. There are also concerns that a tax on electricity generators could hit their green investment plans. Sources have said that ministers are keen to discuss investment, wholesale prices and security of supply with power generators, rather than a windfall tax.
Would a windfall tax on generators solve the energy crisis?
Extending the levy could raise £4bn, providing some firepower for the government to help with energy bills. However, far more is likely to be needed to cushion the blow for millions of struggling households as rampant inflation forces Britons to pay more for everything, from food to petrol.
