Imposing a windfall tax on renewables generators would be disproportionate to profits

The share price data of Oil and Gas companies (O&G), large electricity generators (GenCos), and Listed Renewable Funds, analysed by Cornwall Insight, has shown extending the windfall tax to include renewable generators would be disproportionate and unfair given the difference in profit. Cornwall Insight have also warned the impact of a loss of investor confidence long-term, could exceed any short-term gains.   

In the upcoming Autumn budget, the current O&G windfall tax looks set to be raised from 25% to 30% and extended to 2028, and there are an increasing number of rumours that renewable electricity generators will also be included in the windfall tax. In anticipation of an announcement, Cornwall Insight analysed share price data sourced from the London Stock Exchange, looking at performance since November 2021. The share price data, which is the best representation of investors’ expectations and measure of the profits experienced by firms, illustrated that the different classes of company must have witnessed substantially different scales of profit in the last 12 months. This demonstrates that treating renewable generation companies and O&G companies as equivalent under a windfall tax regime is not appropriate.

What the data shows:

  • O&G shares prices have climbed to 150% of their price in November 2021.
  • Renewable listed funds peaked at 115% of their November 2021 price and have since fallen back to the same level as early March 2022.
  • GenCos shares remained largely constant until the Russian invasion of Ukraine and have since shown a strong correlation with the wider economy

Figure 1: Share price data of Oil and Gas companies (O&G), large electricity generators (GenCos), and Listed Renewable Funds (YieldCos) since November 2021

Source: London Stock Exchange, Cornwall Insight

Dr Matthew Chadwick, Lead Research Analyst at Cornwall Insight:

“Whilst we cannot know for certain what is going on without a forensic examination of each and every project in the market, this broad scale analysis does allow us to pose some educated hypotheses. These trends likely reflect the underlying sensitivities of different business models to interest rates, and to commodity prices for their place in the energy value chain.

“Renewables listed funds are very sensitive to rising interest rates in the UK, as they heavily impact discount rates for component project valuations, O&G and large electricity generator companies on the other hand are more internationally diverse, with a wide range of exposure to discount rates, meaning inflation is less of a concern.

“The prices may also be impacted by energy buying strategies with renewables ultimately forward trading, or hedging, power to give some certainty of returns to capital investors, many of which dislike too much exposure to power price volatility. This may explain why we did not see a steeper climb in share prices beyond August, as large volumes of forward hedging in early-to mid-summer while prices climbed, saw them miss out on the super peak thereafter. O&G however, trade in the source commodity driving the whole energy value chain – gas – and have therefore been able to forward sell under ever increasing price levels since the end of 2021.

“This analysis is also instructive because we can view Renewable Listed Funds as a representative sample of the broader renewable project world, certainly for onshore wind and solar. If this is true, then it would be rash to assume that there are excessive windfalls to tax in this part of the market. And, if so, then the damage that undertaking such measures could have on investor confidence, and ultimately the increased risk premia on future investments in the medium- to long-term could exceed the benefits that a windfall tax might reap in the short term.”


Notes to Editors

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About the Cornwall Insight Group

Cornwall Insight is the pre-eminent provider of research, analysis, consulting and training to businesses and stakeholders engaged in the Australian, Great British, and Irish energy markets. To support our customers, we leverage a powerful combination of analytical capability, a detailed appreciation of regulation codes and policy frameworks, and a practical understanding of how markets function.