The government has outlined plans to scrap the windfall tax on excessive oil and gas profits if prices return to historic norms over a sustained period.
First introduced by then chancellor Rishi Sunak in May 2022, the Energy Profits Levy puts a marginal tax rate of 75% on North Sea oil and gas production, an industry which made extraordinary profits as the war in Ukraine drove up wholesale prices.
On Friday (9 June) the government announced it was introducing an Energy Security Investment Mechanism, following industry concerns that the levy is resulting in firms cutting back on investment.
The new mechanism will see the rate of tax fall back to 40% if average oil and gas prices fall to, or below, a floor set at $71.40 per barrel for oil and £0.54 per therm for gas, for two consecutive quarters.
According to a forecast by the independent Office for Budget Responsibility, the Energy Security Investment Mechanism is unlikely to be triggered before the levy’s planned end date in March 2028.
So far the windfall tax has raised around £2.8 billion and has been used to help fund the support offered to households, such as the Energy Price Guarantee. It is expected to raise almost £26 billion by March 2028.
Gareth Davies, exchequer secretary to the Treasury, said: “It is right that we recover excess profits resulting from Putin’s war and use the money to help people with their energy bills. Thanks to the revenue raised from windfall taxes on energy profits, we will have helped save the typical household £1,500 on their energy bill by July.
“While we stepped in to help, never again can our energy supplies be at the whim of petrostate despots like Putin. That’s why it’s so important that we secure investment in our own domestic supply, protecting the tens of thousands of British jobs that come with it.
“It would be beyond irresponsible to turn off the North Sea taps overnight. Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk.”
Responding to the news Emma Pinchbeck, Energy UK chief executive, said: “Whilst wholesale prices have fallen, many customers, including businesses, are still struggling with high energy costs, and the long-term solution out of the energy crisis is to move away from a reliance on fossil fuels and produce cheap, low carbon energy here in the UK alongside making our buildings far more efficient.
“Alongside easing the Energy Profits Levy, the government has kept a windfall tax on renewable energy, disincentivising the very technologies that will help insulate the UK from future energy price crises.
“The EU is looking to remove its windfall tax on renewable energy and the US has put billions of dollars behind a huge stimulus package. We’re in a global race for investment and the UK is at risk of losing out on the vital infrastructure needed to keep our energy supply secure. We have an opportunity to build on our existing capabilities and lead the world in green technologies like Small Modular Reactors, Carbon Capture and Storage, hydrogen and floating offshore wind. We urge the government to revisit the Electricity Generator Levy, with this global context in mind.”
Greenpeace UK’s climate campaigner Georgia Whitaker said: “The government’s windfall tax on oil and gas companies already contains more loopholes than a block of Swiss cheese. And now they want to scrap it altogether.
“Even with the ‘windfall tax’ in place, these companies made record profits worth tens of billions of pounds over the past year, while many of us struggled to make ends meet.
“The UK has some of the lowest oil and gas tax rates in the world. Irrespective of what happens to the price of oil and gas, the tax these companies pay should be higher, permanently.
“This cash should be used to help insulate homes and transition the UK to cheap, clean energy, not fill the bank balances of already wealthy shareholders.”
Claire Angell, partner and head of energy tax at KPMG UK, said: “Even though forward price curves currently indicate that this relief will never kick in, the government hopes that this provides sufficient downside protection to secure investment to help increase long-term energy security.
“However, with this being the third change to oil taxation in just over a year, fiscal uncertainty for those investing in the UK oil and gas sector remains a challenge for an industry whose future depends on long-term investment decisions.”