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Shares in some of Britain’s biggest power companies fell sharply on Tuesday over concerns that the government will hit electricity generators as well as oil and gas companies with a windfall tax.
Pressure is mounting on ministers to do more to help households offset the soaring cost of living as the UK regulator warned that domestic energy bills were expected to jump more than 40 per cent later this year.
Shares in Drax, owner of the UK’s biggest power station, tumbled 16 per cent, Centrica dropped 10 per cent and SSE fell almost 9 per cent in London on Tuesday after the Financial Times revealed that UK chancellor Rishi Sunak had ordered officials to widen the scope of a potential windfall tax.
The Treasury had already been looking at imposing a levy on the profits of North Sea producers, including BP and Shell, which have reported bumper profits driven by high oil and gas prices in the last year. But officials have also been asked to look at expanding the levy to other companies in the energy supply chain as domestic energy bills have soared.
Jonathan Brearley, Ofgem’s chief executive, told MPs that he expected the price cap, which limits the amount the vast majority of British households pay for gas and electricity, to rise 42 per cent to about £2,800 a year in October. The price cap is currently set twice a year but the regulator has proposed to shift to quarterly reviews.
Brearley told the House of Commons business select committee on Tuesday that volatility in energy markets had worsened since Russia’s invasion of Ukraine and that there was little sign of a sustained retreat in prices.
“We are expecting a price cap in October of £2,800,” Brearley told the committee, adding that he would send a letter to Sunak later on Tuesday. Ofgem has already raised the annual price cap to £1,971 in April. At the end of 2020 it stood at £1,042.
Energy suppliers have warned that 30 to 40 per cent of households could end up in fuel poverty in the coming winter.
Analysts said a levy on electricity generators would also hit several large foreign-owned energy companies, including ScottishPower, a subsidiary of Spain’s Ibedrola, France’s EDF Energy and Germany’s RWE.
The proposed wider windfall tax would also include smaller generators that benefited from an early subsidy scheme to encourage the construction of low-carbon energy generation, which are thought to have profited handsomely from high wholesale power prices.
But business secretary Kwasi Kwarteng distanced himself from a looming energy windfall tax on Tuesday, telling the committee that he had been very clear in his opposition to a windfall tax not least as it could harm UK efforts to hit its 2050 net zero target by discouraging generators from investing in renewables.
“We are asking generators to deploy record amounts of capital to build the infrastructure we need to hit the net zero target so I think that is a challenging proposition,” he said.
Kwarteng said that Sunak was also “instinctively against windfall taxes” but did not deny that the policy was becoming increasingly likely. “If [Sunak] feels that these extraordinary times require extraordinary measures, that’s up to him,” he said.
Investec’s energy analyst Martin Young agreed with Kwarteng, saying that ministers backing a windfall tax should be “careful what [they] wish for”.
Oil and gas producers also criticised plans for a levy. Linda Cook, chief executive of Harbour Energy, the biggest oil and gas producer in the North Sea, told a conference in Aberdeen that additional taxes “would be detrimental to energy sector investment levels, to our domestic energy security and to our sector’s ability to further the country’s energy transition ambitions”.
Yet executives in the North Sea oil and gas sector are privately resigned to the likelihood of a windfall tax. “We are probably in the situation where it is inevitable,” said one.
Sunak’s officials are working on a windfall tax model for North Sea oil and gas producers similar to the one introduced by then chancellor George Osborne in 2011, according to those briefed on the policy. Osborne increased the “supplementary charge” levied on oil and gas production and raised £2bn. The extra charge only fell to its original level when the oil price returned to a trigger price of $75 a barrel.
Dan Alchin, director of regulation at Energy UK, said that generators had invested billions to help transform the country’s energy system, and were “ready to deliver billions more to help the country reach its climate change targets”.
“We need to be careful of any actions that could inadvertently jeopardise the pathway to energy security, net zero and reliable low-cost electricity,” he said.
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