Following the announcement from the Chancellor of the Exchequer that the UK Government will be introducing a temporary, targeted energy profits levy, Dan Atzori, Research Partner at Cornwall Insight, had some thoughts.
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.