An energy windfall tax too far?

New paper from Energy UK warns extending windfall tax to cover power generators would seriously clean net zero transition and push up energy bills in the long term

With Number 10 desperately hunting for policies that might save Boris Johnson’s embattled premiership, attention has quickly turned to one of the few things that can unite the warring Tory tribes: tax cuts.

The problem, as a Conservative government that has already pushed taxes up to record levels has found, is that tax cuts need to be paid for, and the Treasury’s coffers are looking for bare. As such, fears are growing that Chancellor Rishi Sunak could return to an idea he flirted with just a few weeks ago and extend the new windfall tax on oil and gas majors to cover power generators. After all, the windfall tax on oil and gas companies has proven wildly popular with the public and the accompanying targeted tax breaks have kept complaints from the industry to a manageable minimum. Why not extend it to power generators, some, but by no means all of whom, have been benefiting from sky high energy prices?

Well, today Energy UK attempted to get out ahead of any pre-autumn Budget debates on energy tax reform and set out why a windfall tax on generators would be a hugely risky move. The trade body published a briefing paper detailing widespread fears across the industry that a windfall tax would pose a major threat to both the UK’s net zero and energy security strategies, while also placing yet more upward pressure on bills.

The paper also highlights that some of these risks have already manifested, noting that last month’s reports that the Treasury was looking at a wider windfall tax that would take in generators saw over £4bn knocked off the value of key electricity firms. “This has a direct impact on the private sector’s ability to invest in crucial new energy infrastructure,” the paper warned. It also argued that a windfall tax on generators would place more suppliers at risk of given collapse that some integrated power businesses have been able to offset on-going losses from their retail operations through profits from generation, adding that such a scenario would “lead to higher household energy bills”.

In addition, the report stresses that the UK’s largest energy generators are planning to invest more than £100bn in overwhelmingly low carbon energy infrastructure over the course of this decade and already pay over £4bn in taxes to the Treasury.

“Energy generation is a long term industry, with investment horizons that span decades,” the paper states. “A windfall tax on generators could delay and increase the cost of these investments, at a time in which the UK needs to expand improve security of supply and rapidly the UK’s low carbon to provide clean, cheap, and domestically sourced electricity.”

It adds that a windfall tax would result in increased investment costs for major developers leading to higher energy bills; prolonged reliance on expensive and volatile international gas prices; fewer new jobs and skills across the country; and delays to critically important projects that enable our Net Zero goals.

“The next decade will be critical in ensuring sufficient investment to reach both our climate change and domestic energy security targets,” said Adam Berman, deputy director at Energy UK. “Generation is a long-term industry, with investment horizons that span decades and a windfall tax on generators could delay and raise the cost of these investments – at the very time that we need to increase spending to meet the government’s own.”

He also warned any windfall tax could erode the government’s wider efforts to tackle the cost-of-living crisis. “Customers are facing a cost-of-living crisis that has been driven by international gas prices so – while the support package announced recently was very welcome – we also need to be very careful of any actions that could inadvertently push up the cost of investing in new generation, forcing consumers to pay higher energy bills for longer,” he said. “Generators have already invested billions of pounds of investment and, given the right framework, are ready to deliver billions more to help the country reach its climate change targets and reduce our dependence on the volatile fossil fuel prices that are causing record energy costs for customers At present. We need to make investment in cheap, clean, domestic generation easier – not harder – and with electricity demand set to double by 2035, a windfall tax would jeopardise our pathway to energy security, net zero electricity, and reliable low-cost .”

It is an argument that is likely to cut through in parts of government. Business Secretary Kwasi Kwarteng has made no secret of the fact he remains concerned about the windfall tax on oil and gas companies could deliberate investment and is wary of windfall taxes as a point of principle. But equally, with energy companies less than popular with the public and some generators seeing revenues increase as a result of high wholesale power prices the Treasury could be tempted to look at the idea once more as pressure mounts on the Chancellor to find a way to cut payroll taxes.

The debate comes as a separate report from analyst firm Cornwall Insight and law firm Womble Bond Dickinson reiterated that a stable and coherent policy environment will prove critical to achieving the government’s net zero energy goals. Titled UK and the energy transition: Leading the way?the report analysed a range of different energy markets, such as solar PV, onshore wind, offshore wind, low-carbon hydrogen and carbon capture utilization and storage (CCUS), and storage, which are all set to play a critical goal in delivering on the UK’s net zero goals. It concluded that while the UK government is in “a good position to become a global leader in decarbonising its economy” action is urgently needed to tackle a number of “key problem areas”.

“This includes strengthening domestic supply chains to boost economic growth and engaging with local communities to roll-out renewable technologies such as onshore wind and solar,” the report states. “Crucially, the UK also needs to exploit first mover advantage for low-carbon hydrogen and CCUS by providing clarity on business friendly models for new technologies, hence allowing industries and investors to make appropriate investment decisions.”

The report also echoed Energy UK’s warnings, noting that with ever increasing power prices forecasted up to 2044 there was a crucial need to “build confidence for investment in renewable energy”.

“The UK is already a global offshore wind leader, has some clear competitive advantages in the development of floating technologies at scale, and is paving the way to utility-scale low carbon hydrogen and CCUS,” said Naomi Potter, lead research analyst at Cornwall Insight. “There are critical challenges facing the country as it pushes forward with its decarbonisation ambitions. These challenges are not insurmountable, however, and building on its strong foundations, the country can make significant strides towards environmental sustainability and energy independence, while unlocking investment opportunities. “

The fear within the clean energy industry is that the Prime Minister’s political problems could yet attempts to streamline planning rules, trigger further windfall taxes, and lead to delays to crucial policy decisions on hydrogen, CCUS, and other areas, all of which could be characterised as pushing up bills. The opportunities are there, the hope is that a government marred by political in-fighting can still find a way to seize them.

.

Leave a Comment