Spectre of windfall tax returns to spook Big Oil
Finance ministers across the globe have a haunted look. All the talk is of inflation and recession, and of looming black holes in already stretched public finances.
Last week, the Bank of England said inflation would probably peak above 10% this year and potentially send GDP growth into reverse. The Bank warned that Britain’s economy would shrink by 0.25% over 2023 as a whole — in effect, a slow-motion recession. So Rishi Sunak is going to be short of money to dish out to cap-in-hand ministries such as health and defence.
In the UK, the prospect of a windfall tax on Big Oil — BP and Shell, among others — is back on the agenda. The surge in demand for oil and gas as the world recovers from the pandemic has been compounded by supply declines due to Russia’s invasion of Ukraine and widespread embargoes on Vladimir Putin’s oil and gas.
This has led to BP announcing bumper profits of £5bn for the first quarter of 2022, more than double the figure for the same period last year. Likewise, Shell made £7.3bn in the first three months, nearly tripling its profits last time. This was despite pulling out of Russian oil and gas, which BP says will cost it £20.6 billion, and Shell puts at £3.1bn.
BP chief executive Bernard Looney had already painted a cross on his own back by admitting late last year that soaring global commodity prices meant his business was a “cash machine”. But is there any merit to a windfall tax?
Such levies have already been implemented by governments in Bulgaria, Spain, Italy and Romania to ease the strain of soaring energy costs by redistributing the funds to support those forced into fuel poverty.
Businesses do not like windfall taxes, which are defined as those levied when unusual economic conditions allow certain industries to generate above-average profits. The wind blows and an apple falls into a company’s lap without any corporate effort, ingenuity or innovation.
The orthodox business view is that windfall taxes are arbitrary, unfair and bad practice — a weapon of tyrannical governments.
Meanwhile, the UK oil and gas industry complains that such a tax will deter investment, as companies will no longer be able to rely on the stability of the tax regime. In any case, North Sea oil and gas companies already pay 40% tax on their profits —double the standard corporation tax rate.
“Ninety per cent of the time, I’d agree that windfall taxes are a bad thing. However, the current political logic is hard to resist,” said Dan Neidle, a former tax partner at law firm Clifford Chance who recently set up Tax Policy Associates, a non-profit company that advises on fair tax across the world.
He added: “Nevertheless, were I the chancellor, I’d be quiet for now, wait for the end of the year — by which time these huge profits will be enormous — I’d cross my heart and hope to die when saying, ‘It’s strictly a one-off, never-to-be repeated event.’ I’d make sure it’s completely retrospective and then go for it.”
The methodology and calculations for such taxes are “frightfully difficult”, Neidle conceded, but they hinge on being transparent about your workings.
There is no shortage of precedents. George Osborne dismayed oil and gas companies by raising the supplementary charge in his 2011 budget from 20% to 32% to fund a “fair fuel stabiliser”.
Read the full story at The Times
UK households resort to ‘buy now pay later’ loans to cover energy bills
UK households struggling with surging energy costs are being tempted into “buy now, pay later” financing schemes to spread out payments on their electricity and gas bills as the cost of living crisis deepens, according to consumer groups.
Energy and debt advice groups have warned the “really worrying” development is a sign that individuals and families are having to resort to increasingly “desperate” measures to cover basic expenses. Energy Support and Advice UK, which runs a Facebook-based advice service for consumers worried about their bills, this week issued a warning on its site to treat “buy now, pay later” (BNPL) offers to help with rising energy costs with “extreme caution” after detecting an increasing number of posts about such financing arrangements.
Gemma Hatvani, founder and chief executive of Energy Support and Advice UK, warned that some households were bypassing their suppliers and being tempted into BNPL arrangements even though they were “just delaying the inevitable”. “It is really worrying,” Hatvani said. “It’s going to cause massive problems.” Buy now, pay later company Zilch is offering households the option to pay towards energy bills in four instalments over six weeks at zero interest. Zilch, which earlier this year attracted criticism for promoting its services to buy food and takeaways, insisted it offered consumers the opportunity to manage their energy costs “in a better way” than credit cards, which are used by millions to pay for electricity and gas bills and attract high interest rates.
“Anyone who falls behind on repayments is immediately stopped from borrowing any more and provided with contacts for independent debt advice charities,” the company said. “Zilch has never charged a customer a late fee and never had to use a debt collection agency since inception.”
It added that customers who experienced cash-flow difficulties could choose to “snooze payments”. But debt and energy advice groups warned that consumers were better off approaching their energy supplier to negotiate repayments. Matthew Upton, director of policy at Citizens Advice, a charity, said borrowing through BNPL “can be like quicksand — easy to slip into and very difficult to get out of”.
Richard Lane, director of external affairs at debt charity StepChange, said: “Using credit to pay for essentials is a big red flag for us as a debt charity that indicates that someone is in problem debt, so it’s an especially worrying development to see buy now, pay later services used to pay for energy bills.”
Adam Scorer, chief executive of fuel poverty charity National Energy Action, said the development was “another sign of how desperate things have become”.
The UK government is coming under increasing pressure over its response to the energy price surge, which is fuelling a wider cost of living crisis.
Millions face winter bill increases, warns energy boss
The boss of Scottish Power has warned that millions of customers face an horrific winter unless there is a major government intervention in energy firms.
Keith Anderson, chief executive of Scottish Power, told the BBC that another expected rise in energy bills in October to between £2,500 and £3,000 a year could see huge losses for suppliers and many customers unable to pay their bills.
He warned regulator Ofgem that setting the new price cap too low could risk suppliers collapsing or the foreign owned firms leaving the market.
Mr Anderson has put some flesh on the bones of a plan he first mentioned in a frank exchange with a committee of MPs three weeks ago.
He has called for the millions of households to have their energy bills reduced by £1,000 this October.
He said the government’s plan to give each household £200 towards their energy bill – a sum that will need to be paid back – would not be enough.
“We need to be realistic about the gravity of the situation – around 40% of UK households, potentially 10 million homes, could be in fuel poverty this winter,” Mr Anderson explained.
The price cap is set to be increased again in October.
To date, the government has said it will offer extra relief of £150 in April via the council tax system in England, and in October customers in England, Scotland and Wales will receive a £200 rebate on their energy bills.
They will have to repay this at £40 a year for five years, starting in April 2023.
However, Mr Anderson said a £10bn tariff reduction fund could be paid for by adding £40 annually to all household energy bills for the next decade. He said this would be the most effective to avoid fuel poverty for the most vulnerable.
Mr Anderson said that such a fund would directly tackle the biggest cause of the cost of living crisis in a way that other measures – such as the recent 5p cut to fuel duty or a possible cut to the frequency of MOT testing – do not.
Households on pre-payment meters and those in receipt of benefits would be eligible for the discount.
Renewables projects face 10-year wait to connect to electricity grid
Renewable energy developers are facing delays of up to a decade to connect new capacity to the electricity grid, threatening the government’s pledge to shift away from fossil fuels and meet net zero targets.
The UK recently set out ambitious new goals to more than double existing renewable generation capacity, adding 50 gigawatts of offshore wind by 2030, 70GW of solar by 2035 and 24GW of nuclear by 2050. But developers say they are being told that they will have to wait six to 10 years to connect to the regional distribution networks because of constraints on National Grid’s network.
“The majority of large developers are now seeing construction-ready projects being delayed as a result of long queues and excessive charges to get access to the transmission system,” said Catherine Cleary, specialist engineer at consultancy Roadnight Taylor, which advises companies including British Gas owner Centrica and solar developer Lightsource BP on their grid connections.
“Although there are proposals for new infrastructure, the lengthy timelines for this threaten to derail the net zero targets.”
The issue of who pays for improvements to the electricity distribution network is crucial given that it is privatised, with the FTSE 100 listed National Grid providing the bulk of the central transmission network across Great Britain and supplying the six regional monopolies whose pylons, poles, wires and cables carry electricity to end users.
The monopolies’ investments and how much they charge consumers are regulated via price controls set by watchdog Ofgem, which has been under pressure to get tough after being accused of allowing the companies to make excess profits. The regional distributors earn their revenues from a surcharge on customer bills, with up to a fifth of the typical household energy bill — or roughly £371 a year — going towards the cost of the distribution network.
National Grid says it has historically had 40-50 applications for connections a year but that this has risen to about 400 as renewables suppliers have proliferated. This is in addition to significant volumes of applications coming via the six regional distributors.
Roisin Quinn, director of customer connections at National Grid, said it was working with Ofgem and the industry to address the long queues, including by changing processes so that developers can no longer take network capacity before they have planning permission or have even started construction.
The company is proposing to upgrade the network on a project-by-project basis, building bigger substations and more overhead lines.
“We are taking action at pace, along with the wider industry, to speed up the process for customers based in areas with longer waiting times,” she said.
However, the industry is concerned over the cost of improvements to the network, which are needed to shift from a system designed to serve large coal-powered plants close to urban centres to more dispersed renewables developments such as solar and wind farms.
Burdening smaller-scale projects with these transmission upgrade costs, which can be in the region of £12mn per substation, renders many projects unviable, according to Roadnight Taylor.
It is also a postcode lottery as to how much they are charged. Ofgem has looked at connection charges across the industry but was “notably silent” on the issue of excessive charges for transmission upgrades, said Cleary.
Read the story in full at Financial Times
Windfall tax on oil giants won’t hurt British pensioners, thinktank finds
Britain’s main pension funds own less than 0.2% of Shell and BP shares, undermining claims that a windfall tax on big oil companies would harm the retirement incomes of UK savers.
A review of the oil giants’ shares by the Common Wealth thinktank shows the largest holdings are by US investment companies, including BlackRock and Vanguard, and the wealthy Norwegian pension funds. The UK’s multibillion-pound defined contribution occupational pension funds, which hold the savings of tens of millions of workers, rank among the least important investors after decades of spreading their investments in different markets around the world.
Last week, oil industry supporters defended the government’s refusal to levy a windfall tax on North Sea oil firms, including BP and Shell, by saying it would force them to cut investment and dividend payments to shareholders. BP chief executive Bernard Looney, announcing record quarterly profits of £5bn last week, said plans for “up to £18bn worth of investment” over the next eight years would go ahead even if there was a windfall tax on the companies’ profits. He said £2.5bn would be spent buying back shares to boost their value.
Shell also reported a record quarterly profit of £7.3bn for the first three months of the year, piling further pressure on the government to use a windfall tax to fund special measures to tackle soaring household energy bills.
Rishi Sunak, the chancellor, who has resisted attempts by No 10 to pay for extra support with higher government borrowing, has hinted that he is considering a tax on oil companies, although business secretary Kwasi Kwarteng is understood to be against the idea.
Nick Butler, a visiting professor at King’s College London who spent almost 30 years as an executive at BP, was among many to argue that a windfall tax would force the oil companies to redirect profits away from shareholders, who he said were ordinary people depending on dividend income to support their pensions.
“I think that shareholders who are just pensioners, they are not men in black hats – they are people like you if you have a BP shareholding in your pension. isn’t taking money out of the system,” Butler told the BBC last week.
The largest 10 direct shareholdings in both companies are dominated by the subsidiaries of US asset management giants BlackRock and Vanguard, while Asian and Norwegian sovereign wealth funds also own substantial chunks. BlackRock subsidiaries account for four of the largest 10 BP shareholders, and three of the top 10 Shell shareholders.
Read the full story in The Guardian
Energy suppliers doubling customers’ direct debits
Energy customers are increasingly seeing unjustifiable increases to their direct debits, research has claimed, as Ofgem opens an investigation against firms.
A survey of 41,000 people from Money Saving Expert found that 30% of British Gas, Octopus and Shell Energy customers claimed to see their direct debits double after the energy price cap increases.
Some 27% of Eon customers told Money Saving Expert that their direct debit had doubled, as did a quarter of EDF customers.
The price cap climbed from £1,277 to £1,971 last month, a 54% increase.
Last week business secretary Kwasi Kwarteng accused energy firms of overcharging customers on purpose to shore up their own finances.
Energy companies are allowed to increase their customers’ direct debits based on estimated annual energy use and rising tariffs.
However, campaigners say some appear to be exploiting the situation to shore up their balance sheets in breach of rules, by demanding bigger than necessary payments.
Ofgem has launched an investigation into the market and ordered companies to hand over their data.
Money Saving Expert’s Martin Lewis said: “While a higher direct debit doesn’t mean you pay more in the end – any overpayments are ultimately due to be repaid – it does mean far too much cash flowing from accounts now, which is often a nightmare amid the cost of living crisis.”
Octopus Energy said that its own analysis of customer account data showed only 15% of those in credit who’d been on its standard tariff for over three months had seen their monthly payments double, with a median increase of 59%.
A spokesman for the firm said: “The crisis is real – energy customers are stressed by huge bill rises – but people need help, not misleading surveys.
“The survey data is wrong. For example, they claim 32% of our customers saw direct debits double. The reality is that it’s 15% and therefore less than half of that.”
British Gas said that the higher than average increase could be because it offered an option for customers to freeze their direct debits at their existing levels last winter.
Cumbria coal mine: Steel expert claims little demand for coal
A proposed coal mine in Cumbria would have only one UK customer who would buy just a “small amount”, a senior steel expert has said.
The Woodhouse Colliery in Whitehaven would supply metallurgical coal for the production of steel, not for energy.
Chris McDonald, chief executive of the Materials Processing Institute research centre, said only Tata Steel would buy it and would not want much.
But West Cumbria Mining said it was a “myth” no coal mines were needed.
Communities and Local Government Secretary Michael Gove, who is considering the application, is expected to make a decision by July.
At a public inquiry into the mine, which concluded in October, the company’s solicitor said the UK and EU could not “continue to offshore our emissions for the next 30 plus years, by importing coal or by importing steel products”.
Supporters of the mine have told Mr Gove it would reduce reliance on Russia and cut emissions when coal is shipped from abroad for British Steel.
But, speaking to the Local Democracy Reporting Service, Mr McDonald said British Steel “couldn’t use the coal from Cumbria because it’s not of the right quality”.
“That leaves Tata Steel and they said they can use a small amount of the coal,” he said.
“Tata Steel have said they don’t buy Russian coal anyway.”
Mr McDonald said the steel industry was looking at new ways to decarbonise and metallurgical coal still produced carbon dioxide went burnt.
“All of the major steel companies in Europe are developing new technology,” he said.
NI Water’s electricity bill soars to £70m
NI Water, the region’s largest electricity consumer, spent close to £70m on energy in the last 12 months, Sunday Life can reveal.
And the jaw-dropping figure is double the previous year — proving as well as countless families — others are feeling the financial pain.
The government-owned company consumed more than 300m kwh of electricity over the year to March.
Two electricity supply companies, SSE Airtricity and Budget Energy, recently announced increases, while a 37% price hike from Firmus Energy came into effect last week.
Power NI, a subsidiary of Dublin-headquartered Energia, has a contract to supply electricity to NI Water, signed in 2019 with the promise more than 40% would be sourced from renewables.
NI Water, wholly owned by the Department for Infrastructure (DfI), supplies 559m litres of drinking water to approximately 850,000 households and businesses, and collects 318m of waste water from approximately 700,000.
“For the 20/21 and 21/22 comparison and rounded up, the figures have approximately doubled or more,” a NI Water spokesperson said.
The total spend on energy for 20/21 was approximately £32.5m, slightly less the previous year and down from £34.3m in the year to the end of March 2019.
Recent increases in prices, and the expectation they will not drop dramatically from the highs, has added focus to the drive to generate its own energy, including from solar and wind, the company said.
“NI Water is the biggest user of electricity in Northern Ireland and since the price we pay for that electricity is linked to the global price of gas, our costs have soared, ” a spokesperson said.
The company said it has “invested in developing a range of renewable self-generation projects, including a major solar farm.”
“There are plans to further invest in an additional 8MW of solar in the near term. In addition, the energy sector and market mechanisms are evolving,” it added.
The company added the energy crisis and the need to address climate change “mean we have to end our dependence on fossil fuels as soon as possible”.
“Creating an indigenous renewable energy system in Northern Ireland is no longer just an aspiration. It has become an economic necessity,” the spokesperson said.
We don’t want to stop home development – only ensure that it is sustainable
In response to an article about wetland protection laws delaying homebuilding that claims nutrient neutrality “has halted development across a swath of England” the chair of Natural England, Tony Jupiter, writes in The Guardian:
Nutrient neutrality is not about stopping developments – it’s about ensuring any new development does not make nutrient pollution worse in those areas where there is already a longstanding and serious water pollution problem.
This difficult measure is now necessary to protect fragile freshwater habitats and wildlife because the problems have been allowed to build up. We want to support planning authorities and developers to build sustainable new homes and contribute to healthy rivers and seas. In partnership with the government, we are working with the affected authorities to implement measures so home building can continue.
Tony Juniper, chair, Natural England The Guardian
Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House.