Chancellor Rishi Sunak has ordered officials to draw up plans for a possible windfall tax on more than £10bn of excess profits by electricity generators, including wind farm operators, on top of a hit on North Sea oil and gas producers.
Treasury officials are working on a scheme that would go well beyond Labour’s original windfall tax plan, as Sunak looks to raise billions of pounds of financial support for households struggling with soaring energy bills.
“North Sea oil and gas producers are only half the picture,” said one government insider. “The other half is that high gas prices have led to some pretty substantial windfall profits for all electricity generation.”
By pulling big power generators such as SSE, ScottishPower, EDF Energy and RWE into the scope of any windfall tax Sunak would sharply increase the revenue it brings in.
Sunak and Boris Johnson urgently want to set out measures to address rising energy bills and how to pay for them, officials say. An announcement could come this week or after the Jubilee bank holiday in early June.
The chancellor has previously opposed a windfall tax, but said this month that he was “pragmatic” and that if oil and gas producers did not quickly increase their investment commitments then “no option is off the table”.
Rocketing gas prices have a knock-on effect in the electricity market and result in higher wholesale prices across the sector, including for some producers of renewable and nuclear power.
Labour claims that its proposed windfall tax, which would apply only to North Sea oil and gas producers, would raise about £2bn. Analysis by Greenpeace UK claims they will make windfall profits of £11.6bn this year.
Government estimates suggest that electricity producers could have made a similar amount in excess profits — more than £10bn — as a result of higher gas prices.
One energy expert said the idea of excess profits for producers was “a very simple bit of economics”, saying it was more accurate to talk about “the gap between their costs and the price set by gas”.
Deepa Venkateswaran, analyst at Bernstein, said a windfall tax on electricity generators would be a “blunt instrument” as many power producers sell their output in advance, limiting how much they have benefited from recent high prices.
She also noted that many big generation companies are investing heavily in technologies such as offshore wind to help Britain reach its 2050 net zero emissions goal. The government would need to be careful, she added, saying that “any retrospective or knee-jerk measures . . . will backfire”.
The Spanish government announced an “excess profit” levy on Spanish electricity companies last year but then watered it down in October after warnings that it would damage investment in wind farms.
Downing Street and the Treasury said no decision had been taken to impose a windfall tax. “We would only do it if we conclude it’s the only way to fund something we conclude has to be done,” said one ally of Boris Johnson.
Tory rightwingers oppose a windfall tax, but Sunak does not want to fund a rescue package for households struggling with higher bills through large-scale additional borrowing, fearing that it could fuel inflation.
Sunak’s officials are working on a windfall tax model for North Sea oil and gas producers similar to the one introduced by 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.
Under Sunak’s plan, oil and gas producers could continue to pay a higher charge for a number of years if wholesale prices remain high.
A Treasury spokesperson said the government had already provided a £22bn package of support and that while it could not shield everyone “we understand that people are struggling with rising prices”.
Owners of gas-fired power stations have passed on their higher input costs to customers through inflated prices.
A more obvious windfall has been enjoyed by longstanding owners of low-carbon schemes, such as onshore wind farms or solar, which received subsidies on top of wholesale prices under a “renewables obligation certificates” scheme.