What is a windfall tax and will it be extended to UK energy providers?
Interest in a windfall tax on electricity generation companies has re-emerged after industry executives met the chancellor, Nadhim Zahawi, and the business secretary, Kwasi Kwarteng, on Thursday. The former chancellor Rishi Sunak introduced a windfall tax on North Sea oil and gas operators in May. Here, we examine the issue.
A windfall tax is a one-off levy on a sector that has made huge profits from something they were not responsible for. The government has imposed windfall taxes on industries before: in 1981, the then Conservative chancellor, Geoffrey Howe, levied the banks, arguing they had benefited from high interest rates. In 1997, the Labour chancellor, Gordon Brown, raised £5.2bn from a windfall tax on privatised utilities. The pressure is on energy and electricity companies to ease the cost of living crisis, with Brown having called for suppliers who cannot lower bills to be temporarily brought into public ownership.
Oil and gas prices have soared over the past year, notably since Russia’s invasion of Ukraine, triggering calls for companies in the sector to be taxed on their outsized profits. Labour originally argued that a one-off, year-long windfall levy could raise £1.2bn to fund discounts on home energy bills. After splits within the cabinet, Sunak launched the energy profits levy (EPL) in May. It could be in place until the end of December 2025 and is aimed at raising £5bn as part of a £15bn support package for households.
The EPL not only encompassed well-known firms, such as BP and Shell, but also lesser-known ones, such as Harbour Energy, which actually produces more oil from the North Sea than any other UK extractor. After the EPL was announced, BP and Shell said it may affect their green investments, but
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