British energy "windfall profits tax" is tricky, should energy companies make big profits?
To offset rising fuel bills at home, the UK Treasury recently announced that it will impose an additional 25% energy profits tax on "extraordinary profits" in the oil and gas industry.
The announcement said that in the past year, oil and gas prices hit a record high with changes in global conditions, and the tax was levied to help British families ease the cost of living crisis.
This marks a complete change in the attitude of the British Conservative Party government to the "windfall tax" of energy under high inflation pressure: not only has it abandoned its stance of rejecting the "windfall tax" for several months, but also taxed more strongly than the previous opposition Labour Party. The proposed version is larger.
In addition to oil and gas, the UK Treasury is also considering expanding the scope of the "windfall profits tax" to the power generation industry.
The sudden change in the policy has triggered a strong public backlash from the outside world. Critics believe that the swaying policy will have little short-term effect in addition to worsening the investment environment, and will lead to shrinking domestic energy production and increasing import dependence in the UK.
At the end of the day, consumers will still face rising energy costs, and short-sighted policies will bring long-term pain.
tricky windfall tax
Previously, the UK oil and gas industry was required to pay a gross tax rate of 40% on its profits, including a 30% Ring Fence Corporation Tax and a 10% surcharge.
The additional "windfall profits tax" would suddenly raise its overall tax rate to 65%.
The new levy will bring in a substantial amount of revenue.
“The oil and gas industry is making huge profits, but it’s not the result of their innovation or efficiency, but partly the result of the Russian-Ukrainian war driving global commodity prices soaring,” said Chancellor of the Exchequer Rishi Sunak. The tax, effective immediately, is expected to raise £5bn over 12 months to support people struggling with soaring energy costs.
The measure, which is not a one-time levy, will continue until "oil and gas prices return to historically normal levels" or until the end of 2025.
Policy designers have tried to reduce enforcement resistance while stimulating investment by pairing it with "super-deduction" tax breaks.
Under the new 80% allowance, businesses can enjoy a tax relief of 91p for every £1 they invest.
Officials believe this will encourage companies to invest in oil and gas extraction in the UK, with "the more companies invest, the less tax they pay".
Although the primary target of the "windfall profits tax" is the oil and gas industry, it is likely to expand to the power generation industry.
The UK government estimates that power producers have also made more than £10bn in "excess profits".
Some renewable and nuclear power producers have also benefited from higher electricity prices (but not all, depending on the specific electricity pricing mechanism) as soaring natural gas prices have a knock-on effect on the electricity market, leading to significant increases in wholesale electricity prices across the industry.
The UK Treasury claimed that "parts in the power generation industry have also made excess profits due to record gas prices" and the government is "urgently assessing the size of these excess profits and how to respond".
According to The Times, Sunak intends to announce next month a "windfall profits tax" on power generation operators as well.
The energy profit tax has drawn considerable opposition.
Judging from the feedback from the industry, the new policy is not only unrealistic, but may even be counterproductive, making the energy security strategy released by the UK more than a month ago directly into vain.
The new levy on UK offshore oil and gas operators is a step backwards, warns the Offshore Energy Industry Association of the United Kingdom (OEUK), "just weeks after the government was committing to a greener and more energy independent country", Energy A profit tax runs counter to that goal.
This will hinder UK offshore energy investment, meaning oil and gas exploration and production capacity will decline, and the UK may become more dependent on other countries for energy over the next few years.
OEUK chief executive Deirdre Michie said investor confidence was built on the predictability of the tax system, and the introduction of new taxes without any negotiation would also undermine investment in offshore wind and other low-carbon energy sources.
She stressed that soaring energy bills were really tough for consumers, but collecting aid money through the new tax raid was hurting UK businesses.
Hardest hit is not only the major operators, but also many other companies in the supply chain that provide specialized equipment and services to the oil and gas and renewable energy industries, and the vast number of jobs behind them.
"This will divert investment and the UK faces less oil, less gas and less renewable energy."
Ryan Crighton, head of policy at the Aberdeen & Grampian Chamber of Commerce (AGCC), said the tax plan would do little more than make the North Sea less attractive to investors.
"This unnecessarily places a hurdle on our path to net-zero emissions and will increase our reliance on imported energy, with greater environmental and financial costs."
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The energy industry is characterized by a long investment cycle and large scale, especially in upstream oil and gas exploration and production.
The temporary "windfall profits tax" has added a fog of uncertainty to the UK's energy investment environment.
The multinational oil and gas giant Shell responded harshly.
Britain's new "energy profits tax" on North Sea oil and gas producers undermined the certainty needed for long-term investment and failed to support the government's energy transition goals, the company said.
A Shell spokesman said it understood the concerns of millions of people facing high energy costs and the need for governments to support consumers to make ends meet.
"But at the same time, we must continue to invest to secure the oil and gas Britain needs today, while we want to allocate future spending on low-carbon energy."
This involves loopholes in the allowances regulations.
Many critics pointed out that the tax exemption policy proposed by the British Treasury only applies to investment in North Sea oil and gas, not green energy investment.
This will pose a dilemma for large oil companies that actively invest oil and gas profits in low-carbon sectors such as offshore wind power, solar power, and electric vehicles.
Analysts believe a "windfall profits tax" on power generators would be more damaging than a tax on oil and gas alone.
Since different types of renewable energy projects have different benefits from the surge in electricity prices, an undifferentiated “windfall profit tax” for power generation may cause unfair impact and harm to the entire industry.
Over the past 20 years, the UK's new energy policy has undergone a transition from a renewable energy obligation mechanism to contracts for difference (CfD).
For the projects that have obtained the renewable energy obligation certification in the early stage, the renewable energy generator can not only obtain sales income in the wholesale market, but also can sell the renewable energy obligation certificate to the power supplier or trading organization to obtain additional subsidies.
However, for nuclear power and renewable energy generators who execute CFDs after 2014, the benefits are locked in advance: under this mechanism, renewable energy generators sign CFDs with contracting parties established by the government, and provide for the implementation of CFDs. electricity price.
When the market reference electricity price (average market electricity price) is lower than the execution price, the government subsidizes the electricity generator for the difference between the electricity selling price and the execution price; when the reference electricity price is higher than the execution price, the electricity generator needs to refund the difference to the government.
A simple understanding is that low-carbon energy generators under the CFD mechanism can only earn so much, and even if wholesale electricity prices rise sharply, they cannot enjoy unexpected premiums.
Bernstein Research analyst Deepa Venkateswaran is skeptical of the so-called "£10bn excess profit".
According to the Guardian, she believes the Treasury has grossly overstated the potential benefits of a windfall tax on renewable energy generators and has shaken investor confidence in the industry.
Many large power generation companies are investing heavily in technologies such as offshore wind to help the UK achieve its 2050 net-zero emissions target.
She added that the government needs to be careful not to backfire.
Conservative MP and former British cabinet minister David Davis publicly criticized that the "windfall profits tax" is neither necessary nor wise, and extending the "windfall profits tax" to power producers will only further aggravate the consequences. The habit and reputation of arbitrary taxation cannot be cultivated."
Should energy companies make a fortune right now?
Politicians across Europe are desperate to show the population that they are battling rising energy bills.
Inflation in the UK has continued to climb for months, with the consumer price index (CPI) rising 6.2% year-on-year in February and 7% year-on-year in March.
In April, the British CPI rose by 9%, the largest increase since the official statistics of the United Kingdom began in the late 1980s. The rising price of natural gas and electricity is an important reason for pushing up the inflation rate.
The head of the UK energy regulator Ofgem has warned that the energy price cap will rise by 42% to £2,800 in October this year, compared with the £1,277 cap in October last year.
The UK's current energy price cap of £1,971 a year, valid until September 31, is almost £700 (54%) higher than the cap six months ago.
Ofgem has implemented an energy price cap system since 2019. The original intention is to prevent energy suppliers from earning excess profits and ensure that energy prices paid by users do not exceed fair prices.
By tracking changes in wholesale energy prices and other costs, the agency typically adjusts energy price caps in February and August each year, taking effect in April and October of that year, respectively.
Soaring household energy bills reflect a rare wild swing in global energy markets.
Ofgem chief executive Jonathan Brearley recently said, "The price changes we're seeing in the gas market are truly events not seen since the oil crisis of the 1970s." He added that a surge in energy price caps in October could make " The number of households living in "fuel poverty" (defined as spending at least 10 percent of their income on energy) nearly doubled from 6.5 million to 12 million.
On the same day as the "windfall profits tax" was announced, the British government released a £15 billion package to ease the cost of living crisis.
At the same time, benefiting from the huge rise in international commodity prices, international oil companies have handed over high-yield first quarter reports: Exxon Mobil's net profit doubled from the same period last year to nearly 5.5 billion US dollars; Chevron Dragon reaped the highest quarterly profit in nearly a decade; Total's profit reached US$9 billion, a surge of US$6 billion year-on-year; bp achieved a profit of US$6.245 billion, up 53.6% month-on-month; Shell's earnings broke its 2008 profit The historical record for quarterly profits since.
This level of profit is the result after deducting asset write-downs, which shows the high earnings of international oil companies in the first quarter.
Although the oil and gas industry has expressed disgust and opposition to the sudden "windfall profits tax", Neivan Boroujerdi, director of North Sea upstream research at energy information firm Wood Mackenzie, said the move is unlikely to make new or existing projects uneconomical, and may even accelerate some "Ready-to-go" project developments, such as Rosebank and Cambo, encourage developers to make final investment decisions.
It may also reshuffle the ranking of some projects in the global portfolio and influence some longer-term investment decisions.
From another perspective, hitting energy companies that have benefited from the price hike is a bit like a hypothetical enemy, and the dominant factor in the dramatic fluctuations in oil and gas prices does not come from energy companies.
Global oil and gas prices have risen sharply since last year, with the outbreak of the Russia-Ukraine conflict adding to market jitters.
Britain and the United States announced bans on Russian energy imports in early March, and the European Union is still rocking.
Energy sanctions have further disrupted supply and demand, leading to a sharp rise in commodity prices.
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