UK predicts up to £170b excess profits for energy firms

UK gas producers and electricity generators may make excess profits totalling as much as £170 billion (S$276.8 billion) over the next two years, according to Treasury estimates that lay bare the revenue-raising potential of a windfall tax.

Treasury officials will deliver the assessment to the next prime minister when they take office on Sept 6, according to a person familiar with the matter, who asked not to be identified discussing internal calculations. 

The prediction is likely to fuel further calls for increasing the existing windfall tax on oil and gas production in the UK, and extending it to power generators that have so far been exempt. Tax at the current windfall rate of 25 per cent could generate tens of billions of pounds if the excess profits for 2023 and 2024 come in at the top of the Treasury forecast.

Excess profits are defined by the Treasury as the difference between the profits energy producers are predicted to make in the future, and the profits they could have expected to make based on the outlook for prices before Russia's invasion of Ukraine. The Treasury declined to comment on the specific forecast, while reiterating that it expects an already-introduced windfall tax on oil and gas producers to raise £5 billion in its first year.

With domestic winter energy bills set to rocket to triple the level they were last year, any further tax revenue could help fund a government support package to help struggling Britons. Both Liz Truss - the favourite to succeed Boris Johnson as prime minister next week - and her rival, Rishi Sunak, have pledged to step up support, though neither has detailed exactly how much.

Truss has repeatedly said she is opposed to windfall taxes, arguing that they "send the wrong message to investors." She's also so far refused to set out how she would help families and businesses struggling with soaring energy costs, arguing that she needs to see figures from the Treasury once she takes office before she can make any final decision.

Kwasi Kwarteng, who is strongly tipped to be Truss's Chancellor of the Exchequer, has also signalled his opposition, even after the government he served in announced one earlier this year. "I have always been opposed to such taxes on principle, and I continue to be opposed," he told the House of Commons in June. 

Sunak, by contrast, announced the current windfall tax in May when he was still chancellor, and has since suggested he would seek to raise more from the levy on energy companies.

The new tax, known as the energy profits levy, is an additional 25 per cent tax on top of existing taxes on oil and gas producers. Legislation passed in July allows the tax to run until the end of 2025. However, it also allows firms to drastically lower the hit they face by investing more money in oil and gas production that could help increase energy supply.

Shell has posted record profits, while Centrica Plc's surging revenue allowed it to resume paying a dividend to investors for the first time since before the Covid-19 pandemic.

The government considered and rejected extending the windfall tax to electricity generators profiting because rising gas prices have also pushed up the price of power those generators can charge. Some of those companies have reported rising profits even in cases where they have produced less energy. 

The Treasury analysis suggests about two fifths of the £170 billion in excess profits would be attributable to power producers, suggesting extension of the windfall tax could be lucrative for the government coffers. But opponents of the tax say it could deter some investment in the UK's renewable energy sector. BLOOMBERG

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