Chancellor Rishi Sunak has ordered officials to draw up plans for a possible windfall tax on more than £10billion in excess profits from power producers, including wind farm operators, in addition to a swipe North Sea oil and gas producers.
Treasury officials are working on a program that would go far beyond the original Work Tax Plan, as Sunak seeks to raise billions of pounds in financial support for households struggling with rising energy bills.
“North Sea oil and gas producers are only half the picture,” a government insider said. “The other half is that high gas prices have resulted in quite substantial windfall profits for all power generation.”
By bringing major power producers such as SSE, ScottishPower, EDF Energy and RWE into the scope of any windfall tax, Sunak would significantly increase the revenue it brings in.
Sunak and Boris Johnson urgently want to work out measures to deal with rising energy bills and how to pay them, officials said. An announcement could come this week or after the Jubilee holiday in early June.
The Chancellor has previously opposed a windfall tax but said this month he was “pragmatic” and that if oil and gas producers did not quickly increase their investment commitments, “no option is excluded”.
Soaring gas prices are impacting the electricity market and pushing up wholesale prices across the industry, including some renewable and nuclear generators.
Labor say their windfall tax, which would only apply to North Sea oil and gas producers, would bring in around £2billion. Analysis by Greenpeace UK complaints they will make windfall profits of £11.6bn this year.
Government estimates suggest power generators could have made a similar amount of excess profit – more than £10billion – due to higher gas prices.
An energy expert said the idea of excess profits for producers was “a very simple bit of economics”, saying it was more accurate to speak of “the gap between their costs and the price set by the gas”.
Deepa Venkateswaran, an analyst at Bernstein, said a windfall tax on power generators would be a “blunt instrument” as many power generators sell their output in advance, limiting the profits they have from recent high prices.
She also noted that many large generation companies are investing heavily in technologies such as offshore wind to help Britain reach its goal of net zero emissions by 2050. The government should be careful, she said. added, asserting that “any retrospective or instinctive measure. . . will turn against you”.
The Spanish government announced an “excess profit” tax on Spanish power companies last year, but then watered it down in October after warnings it would hurt investment in wind farms.
Downing Street and the Treasury said no decision had been taken to impose a windfall tax. “We would only do that if we conclude that’s the only way to fund something that we conclude needs to be done,” said a Boris Johnson ally.
Right-wing Tories oppose a windfall tax, but Sunak doesn’t want to fund a bailout for households struggling with higher bills through extra large-scale borrowing, fearing it will fuel inflation .
Sunak officials are working on an exceptional tax model for North Sea oil and gas producers similar to that introduced by George Osborne in 2011, according to people briefed on the policy.
Osborne increased the “additional tax” levied on oil and gas production and raised £2bn. The surcharge only fell to its initial level when the price of oil returned to a trigger price of $75 per barrel.
Under Sunak’s plan, oil and gas producers could continue to pay higher fees for several years if wholesale prices remain high.
A Treasury spokesman said the government had already provided a £22billion support package and while it could not protect everyone “we understand that people are struggling with rising price”.
Owners of gas-fired power plants have passed on their higher input costs to customers through inflated prices.
A more obvious windfall has gone to long-time owners of low-carbon programs, such as onshore wind or solar farms, who have received subsidies on top of wholesale prices under a “certificate of ownership” program. ‘renewable energy bond’.