A windfall tax on electricity generators making “extraordinary profits” is still an option, UK Chancellor of the Exchequer Rishi Sunak said Thursday after slapping a similar levy on oil and gas companies.
The government decided to impose a 25% levy on the profits of North Sea firms to help fund support for Britons facing a cost-of-living crisis. Power producers escaped the measure, but Sunak said he hasn’t ruled out such a move.
“Until recently, UK utilities had some claim to ‘safe haven’ status relative to continental Europe,” Jenny Ping, an analyst at Citigroup Inc., said in a note. “That status looks to be gone. Whilst the precise details remain to be seen — and oil and gas firms are the initial target — risk looms over the power sector as well, with a windfall tax on power generators still firmly on the table.”
Electricity companies such as SSE have reported booming profits, in part because soaring gas prices have driven up what they charge for power sales. The government has been consulting the industry on potential market reforms that will affect pricing, and plans to set out options in the coming months.
Senior government ministers have long opposed a special levy on energy firms because they fear it will stymie investment. But the pressure to intervene to ease the squeeze on living standards has become intense, with a windfall tax increasingly popular among Britons and a gas price cap also being suggested.
“The current crisis underlines the need to reduce our dependency on expensive fossil fuels and expand our domestic sources of clean, cheap power,” said Dhara Vyas, director of advocacy at Energy UK, the industry lobby group. “We would caution against any action, such as a windfall tax on generators, that could jeopardize these aims and the investment required.”
The long term answer should be reforms to the power market, specifically on so-called “marginal pricing” where the most expensive megawatt needed to meet demand sets the price for all generation, according to Rob Gross, a director at the UK Energy Research Centre.
The introduction of the levy on oil and gas companies “materially increases the likelihood of the government introducing a power-market gas-price cap,” analysts at Morgan Stanley said in a note. Such a measure has recently been approved in Spain and Portugal.
Shares in SSE dropped as much as 4.5% on Thursday, while UK peer Drax Group fell as- much as 3.7%.
SSE declined to comment on the possibility of any future government measures. Drax couldn’t immediately be reached.
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