Government taps oil and gas profits to help pay for fresh £15bn energy bills support

Rishi Sunak has announced a temporary levy on oil and gas company profits in order to help fund a fresh £15bn package of measures to support households facing soaring energy bills today, marking a major U-turn from the Chancellor’s previous referral to back a so- called ‘windfall tax’.

Following record high oil and gas prices over the past year due to lingering Covid supply issues and Russia’s war in Ukraine, the government has faced growing pressure to increase its previously announced packages of support for households, and for fossil fuel firms currently enjoying multi-billion pound profits to help foot the bill.

Earlier this year Sunak had previously warned that “the obvious impact of a windfall tax would be to deter investment – it is as simple as that”.

But today Sunak stressed that while there was a need to get record inflation levels under control and maintain fiscal responsibility, with the energy bill cap set to rise again in the coming months there was now a need to go further than the previous £9bn support package announced in the spring.

Announcing what he called a “temporary, targeted Energy Profits Levy” in Parliament earlier, the Chancellor said oil and gas firms would face a new 25 per cent surcharge on their “extraordinary profits” during the current crisis with immediate impact, hiking their headline tax rate to 65 per cent.

The Levy, which Sunak said would remain in place until fossil fuel prices return to “historically more normal levels”, is expected to raise around £5bn over the next year, with the proceeds used to pay for a host of fresh energy bill support measures for households and businesses announced today.

Legislation is set to be introduced for the Levy, which the government said would have a sunset clause that would effectively draw the tax hike to a close at the end of December 2025.

However, the Chancellor is also stressed that the need to ensure the oil and gas sector reinvested its profits to support the economy, jobs and energy security, as he unveiled a new ‘super deduction’-style tax relief measure that will allow firms to recoup a 91p tax saving for every £1 they invest in the UK extraction of fossil fuels.

The 80 per cent Investment Allowance almost doubles the tax relief available and means the more investment an oil and gas firm makes, the less tax they will pay, according to the Chancellor – although critics were quick to point out that the relief only covers investment in further UK extraction of oil and gas, rather than in the green economy.

“The oil and gas sector is making extraordinary profits,” said Sunak. “We should not be ideological about this; we should be pragmatic. It is possible to both tax extraordinary profits and fairly incentivise investment.”

The government also confirmed it is “urgently evaluating” plans to extend the temporary windfall tax to also cover the profits of electricity generators, such as gas-fired power stations and wind farm operators, noting some of these firms have also reaped “extraordinary profits” As a result of soaring energy prices in recent months.

That could mean operators of clean energy generators such as SSE, E.ON, ScottishPower, EDF and RWE may also face a similar windfall tax in the coming months, in addition to the oil and gas sector firms such as Shell and BP which have been hit with the 25 per cent Levy today.

If extended to include clean electricity generators, the Levy is likely to prove controversial, with opponents fearing it could urgently needed future investment in decarbonising the energy system, although Sunak announced no firm commitments to do so today.

“We are consulting with the power generation sector and investors to drive energy market reforms and ensure the price paid for electricity is more reflective of the cost of production,” Sunak said. “But those reforms will take time to implement, so in the meantime, we are urgently evaluating the scale of these extraordinary profits and the appropriate steps to take.”

The windfall tax U-turn follows months of growing pressure on the government to step up its support for households facing soaring energy and living costs, with charities warning the hike in bills and prices is likely to push millions more families in to fuel poverty.

However, despite widespread calls across the political divide, no further support or funding schemes were announced today targeted at enhancing energy efficiency by upgrading the UK’s notoriously draughty housing stock through measures such as insulation, heat pumps and rooftop solar panels.

The Chancellor did, though, unveil a fresh £15bn package of support measures for billpayers across the UK, targeted in particular at millions of low income households to help deal with the rising cost of living.

The measures include new, one-off £650 payments to more than eight million low-income households on Universal Credit and other state benefits, as well as separate £300 one-off payments to pensioner households and £150 to individuals receiving disability benefits.

Moreover, the £200 energy bill tax council ‘rebate’ for all households announced in the spring is to be doubled to £400, and there will now be no requirement for that money to be paid back as it was previously, effectively giving homes a permanent £400 discount on their bills from October.

That comes in addition to a further £500m funding increase for the Household Support Fund delivered by local councils, which will extend the measure from October until March 2023 and bring its total funding to £1.5bn.

Overall, the Chancellor said the fresh measures announced today would mean eight million of the most vulnerable household would receive at least £1,200 of additional support this year, and would mean most households on average receiving £550 support.

Sunak said the Energy Security Strategy unveiled in April would help reduce energy bills over time “by increasing supply and improving energy efficiency”, and that other government measures would help reduce inflation, but conceded that “households are being hit hard right now” .

“What this means in practical terms is that as we support people more, we need to think about the fairest way to fund as much of that cost as possible,” he said.

The announcement of a windfall tax on the oil and gas sector was broadly welcomed by green groups and think tanks, with many citing polls showing widespread support for such a policy across the political spectrum.

A Public First survey commissioned by Green Alliance found 63 per cent backed a windfall tax on oil and gas firms, with just seven per cent opposed, with 66 per cent of both Labor and Conservative voters in favour.

Shaun Spiers, executive director of Green Alliance, said the move would be “warmly received” by households struggling with rising bills, but stressed the need to accelerate the shift away from fossil fuels towards more efficient, greener, and homegrown energy sources to tackle the long-term problem.

“Unless the transition from expensive gas to cheap renewables and energy efficient homes is accelerated, the government will be continually forced into emergency fixes,” he said.

However, the CBI’s chief economist Rain Newton-Smith raised concerns about the windfall tax, and its potential expansion in scope to include profits from electricity generators, could discourage investment in the UK’s net zero transition.

“Helping people facing real hardship amid one of the worst cost-of-living crunches in recent memory is the right thing to do,” she said. “Despite the investment incentive, the open-ended nature of the energy profits levy – and the potential to bring electricity generation into scope – will be damaging to investment needed for energy security and net zero ambitions. It sends the wrong signal to the whole sector at the wrong time against a backdrop of rising business taxation elsewhere.”

Elsewhere, the CBI and many other figures also highlighted the lack of additional funding support to help upgrade draughty homes with insulation and other measures, with experts have repeatedly pointed out that would help to drive down bills, cut greenhouse gas emissions, and offer a boost to the fledgling retrofit market.

“A street-by-street retrofit revolution to reduce energy demand and help slash energy bills in the long-term was also shamefully absent from the Chancellor’s statement,” said Green Party MP Caroline Lucas. “Investing in energy efficiency is the fastest, cheapest and most effective way to quite literally insulate families from the price rise expected in October – and beats nuclear every time. This announcement was much needed and long overdue – but it should represent a first step, and not the final one.”

Her comments were echoed by many across the business community, including KPMG’s vice chair and head of energy and natural resources Simon Virley.

“Ofgem estimates that average energy bills this winter will be about £1,500 higher than last winter, pushing 40 per cent of households into fuel poverty without further support measures,” he said. “Alongside providing immediate help to households, the Government should also be making a major push on energy efficiency, just as other European countries are. That remains the most cost-effective way to get bills down permanently, reduce our dependence on imported gas and lower our carbon emissions.”

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