Windfall taxes are not the only solution to the energy crisis

The energy market is in a state of transition, with geopolitical concerns threatening to undermine energy security and subsequent wholesale energy rises pushing up bills. It is inevitable that policymakers will look at how best to deliver an affordable energy system for consumers. The temporary, targeted energy profits levy, or windfall tax, while on the one hand may provide an immediate solution, comes with inherent risks to both investment and energy security.    

A key competitive advantage for the UK is that it is perceived as an investment-friendly jurisdiction by developers and investors alike – unexpected costs in the form of windfall taxes, especially if repeated over time, risk creating an unstable environment, and may lead to energy producers, who operate globally, investing and relocating to other areas. Not only would this hamper the UK’s income, but it may deter investment in renewables, slowing our move towards net zero and risking the UK’s energy security in the longer-term.

While electricity generators were left out of the tax this time around, we would caution against their inclusion in any form of windfall tax in the future. The strides many generators have taken towards clean energy solutions are driving our move towards decarbonisation, and it would be counterproductive to the UK’s net zero ambitions were they to be deterred from further investment. The Contract for Difference mechanism is already an effective tool to appropriately support new investment in low carbon generation, whilst mitigating the impact of excess returns and high prices to end consumers, especially in a world of very volatile prices as we have seen in the last 18 months.

With millions of people in the UK currently in fuel poverty, some may rightly ask, without a windfall tax, how we fund support for vulnerable consumers. After all, talk of long-term energy security and net zero cost savings are of little comfort to those currently making the choice between eating and heating. Besides giving all consumers small discounts to their energy costs, there are multiple, more sustainable options available that target support at those most in need, whether this be the introduction of a social tariff, or more work to ensure customers on pre-pay meters are not seeing a disproportionate increase in their bills. The windfall tax is not an enduring solution to the endemic problem of fuel poverty in this country. We must look further, keeping in mind what will happen when bills rise yet again, or our economy hits another crisis.

Ultimately, we need a big focus on reviewing the model of funding, lowering the cost of energy and increasing transparency over the costs of transition towards net zero, if the UK government are to deliver a sustainable, secure and affordable energy system for all.

Related thinking

Low carbon generation

Our response to the announcement of the January price cap

The Energy Price Guarantee (EPG) will shield consumers from the January price cap of £4,279 announced by Ofgem on 24th November, however the rise will be concerning to the government, who will be shouldering the billions of pounds needed to compensate suppliers the difference. While the January price cap was...

Low carbon generation

Is a windfall tax on renewable generation appropriate?

Update after the new Budget announcement on 17.11.2022 In the Autumn Statement, the Chancellor announced that the Energy Profits Levy on Oil & Gas (O&G) companies will be raised from 25% to 35% from 1 January 2023 and extended until March 2028. Additionally, there will be a new, Electricity Generator...

Energy Market Design

Financing Net Zero: A (revenue) cap on UK merchant financing opportunities?

On 13 October 2022, we hosted the latest instalment of our ‘Financing Net Zero’ webinar series. The session, sponsored by Shoosmiths, focused on opportunities and challenges for merchant financed renewable projects amid the current wholesale price volatility.   In recent years, due to the increasing success-rate and profitability of renewable projects,...

Regulation and policy

Government to consult on the introduction of Cost-Plus-Revenue Limit

The government issued its Energy Prices Bill on 12 October. The bill will put in law a number of the already-announced mechanisms that will be used to support households and businesses this winter including the Energy Price Guarantee and the Energy Bill Relief Scheme. Also announced alongside this is the...

Regulation and policy

Energy Price Guarantee – Counting the Costs

Modelling from Cornwall Insight has forecast the two-year cost of the Energy Price Guarantee (EPG) to be between £72bn in the lowest case scenario, and £140bn in the extreme high case scenario1. The data included in our new EPG report ‘Counting the Costs’, shows a near doubling of the forecasts...

Business supply and services

Our initial response to the government energy announcement

We welcome the government’s objective to address the affordability of energy for both domestic and business consumers in the UK. The policy announcements made today will alleviate some of the hardship consumers have been concerned about for many months.   On the household side of the equation, industry thinking is...

Energy Market Design

How does REMA impact energy generation, flexibility and consumers?

The Review of Electricity Market Arrangements (REMA) is the largest review programme of GB electricity market arrangements for a generation. It comes at a time when European energy markets are suffering extreme turmoil. Depending on the outcome there could be significant implications for generators, flexibility providers, and, indirectly, consumers. REMA...

Energy Market Design

REMA: electricity market design choices

Electricity markets will serve as the foundation for the future GB energy system.  This article examines some of the market design decisions that will be considered by the Review of Electricity Market Arrangements (REMA). Market design goals At its most simple, a well-functioning market will attract enough potential “buyers” and...