- Energy levy increased from 25 per cent to 35 per cent
- Generator profit levy brought in at 45 per cent, aimed at low-margin producers making significant profits
UK oil and gas producers will have to hand over more of their super-profits to the government after Chancellor Jeremy Hunt raised the energy levy to 35 per cent, up from 25 per cent. This takes the total tax rate to 75 per cent on profits.
The end date of the plan will also move out to 2028, from 2025.
Soaring September quarter profits from Shell (SHEL) and BP (BP) triggered calls for the government to hike the windfall tax, and Hunt said such levies should “be temporary, not deter investment and recognise the cyclical nature of the energy business”. Alongside the higher levy, the Treasury has cut the investment allowance to 29 per cent from 80 per cent on new oil and gas spending. The existing 80 per cent allowance remains for green spending.
Renewable energy generators like SSE (SSE) will also pay more tax through a 45 per cent tax on "extraordinary returns", classed as those coming in when the energy price is above £75 per megawatt hour (MWh). The average wholesale price for the past week was £116/MWh. The detailed policy said "low-carbon" electricity generators would also be able to bring in £10mn before the levy kicked in. Morningstar analyst Michael Field said this would be offset "to a large degree" by investment allowances, however. "The energy sector specifically had expected much a much harsher outcome," he added.
This scheme has been introduced following a surge in earnings at generators, given the way the market is priced. The costliest wholesale producer determines the price, meaning low-cost options like wind and solar have seen margins soar. SSE reported this week that its adjusted interim profit had tripled to £559mn, although this was also driven by thermal generation.
These two new measures will raise £14bn next year, the chancellor said, while the Treasury said they would raise £55bn over the life of the policies. In the same announcement, Hunt warned of a "doom loop" where higher taxes limit investment and growth. The household energy support scheme, currently capping power bills at an average of £2,500 a year, will run for another 12 months from April, but at a higher £3,000 level.
Earlier this month, Stifel analyst Chris Wheaton told the Investors’ Chronicle that the policy was hitting the wrong companies: “Sticking a windfall tax on oil companies when they are making a whole load of profit on their trading businesses outside the UK, is taking aim at the target and then managing to hit the target next to it, which in this case is the independent sector of the North Sea,” he said.
Harbour Energy's (HBR) share price is down 11 per cent in the past week, while Serica Energy (SQZ) has traded flat. They will contribute proportionally far more than Shell and BP to the government's coffers, given their earnings solely come from the UK. The majors' profits outside the UK are not included in the tax.
Gas prices have come down in recent weeks because of milder weather in Europe and consistent imports of liquefied natural gas (LNG). The energy levy does not have a floor oil or gas price, under which the higher tax rate would not apply.
But analysts see high gas prices continuing for some time. "Next winter will be tougher than this one because gas prices will be higher next year than this; just because storage has refilled and the weather is warm does not mean this energy war with Russia is won," said Wheaton.
