Shares in some of Britain’s biggest power companies fell sharply on Tuesday as Rishi Sunak drew up plans for a windfall tax on the energy sector to help offset spiralling domestic fuel bills.
The chancellor is rushing to complete an emergency energy package to offer relief to households struggling with a spiralling cost of living crisis and the prospect of an £800 increase in fuel costs in the autumn.
Drax, owner of the UK’s biggest power station, tumbled 16 per cent, Centrica dropped 10 per cent and SSE fell almost 9 per cent in London. The sell-off came after the Financial Times revealed that Sunak’s officials were working on a possible windfall tax on electricity generators, as well as North Sea oil and gas producers.
Electricity generators responded furiously to the possibility that they might be included. They argued that they had not benefited from surging electricity prices, saying that the power they generated was sold under fixed, long-term contracts.
One chief executive of a big electricity generator called the proposal “unbelievable” and said it came “completely out of the blue”. He added that it was “completely damaging to investor confidence” at a time when the government wanted them to back big new renewables projects such as offshore wind.
Government insiders said on Tuesday night that no decisions had been taken on whether to extend the windfall tax beyond oil and gas groups and the policy was “not straightforward”, but that it remained on the table.
Boris Johnson, under intense pressure over the partygate scandal, has been distracted by the imminent release of Sue Gray’s official report into the scandal over parties in Downing Street, which is expected to be published on Wednesday.
The prime minister is said by allies to be keen to change the subject by quickly bringing forward the package of measures on Thursday. However, he has yet to sign it off.
Jonathan Brearley, head of the energy regulator Ofgem, set the stage for Sunak’s emergency package by telling MPs that he expected the price cap, which limits the amount most British households pay for gas and electricity, to rise more than 40 per cent to about £2,800 a year in October.
Government insiders say windfall profits by electricity producers, including wind farm operators, are more than £10bn this year. High gas prices have a knock-on effect for producers of all forms of electricity.
Sunak is looking to design the levy to include incentives for companies to step up investment in renewables. He had previously opposed a windfall tax, arguing that it would hit investment in new energy projects, and Tory rightwingers are scathing of the idea. “Maybe the ‘low tax chancellor’ will cut taxes one day,” said one.
Kwasi Kwarteng, business secretary, asked by MPs if he backed a windfall tax on power generators, said: “We are asking generators to deploy record amounts of capital to build the infrastructure we need to hit the net zero target so I think that is a challenging proposition.”
But Kwarteng is said by allies to be resigned to Sunak imposing a windfall tax on energy companies, which could raise considerably more money than the £2bn levy proposed for oil and gas companies by Labour.
“If he feels that these extraordinary times require extraordinary measures, that’s up to him,” Kwarteng said.
Analysts said a levy on electricity generators would also hit several large foreign-owned energy companies, including ScottishPower, a subsidiary of Spain’s Iberdrola; France’s EDF Energy; and Germany’s RWE.
The proposed wider windfall tax would also include smaller generators that benefited from an early subsidy scheme to encourage the construction of low-carbon energy generation, which are thought to have profited handsomely from high wholesale power prices.
Treasury officials are working on a windfall tax model for North Sea oil and gas producers similar to the one introduced by then chancellor 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.
Shell chief executive Ben van Beurden told the company’s annual shareholders meeting that there were “good ways and bad ways of designing a tax structure, and if you do it in a bad way it can discourage investment”.