Shares in UK energy firms slide over windfall tax fears

Pressure mounting on government as regulator warns energy bills may rise by over 40%

Shares in some of Britain's biggest power companies fell sharply on Tuesday over concerns that the UK government will hit electricity generators as well as oil and gas companies with a windfall tax.

Pressure is mounting on ministers to do more to help households offset the soaring cost of living as the UK regulator warned that domestic energy bills were expected to jump more than 40 per cent later this year.

Shares in Drax, owner of the UK's biggest power station, tumbled 16 per cent, Centrica dropped 10 per cent and SSE fell almost 9 per cent in London on Tuesday after the Financial Times revealed that UK chancellor Rishi Sunak had ordered officials to widen the scope of a potential windfall tax.

The treasury had already been looking at imposing a levy on the profits of North Sea producers, including BP and Shell, which have reported bumper profits driven by high oil and gas prices in the last year. But officials have also been asked to look at expanding the levy to other companies in the energy supply chain as domestic energy bills have soared.

Price cap

Ofgem chief executive Jonathan Brearleytold MPs he expected the price cap, which limits the amount the vast majority of British households pay for gas and electricity, to rise 42 per cent to about £2,800 (€3,300) a year in October. The price cap is set twice a year but the regulator has proposed to shift to quarterly reviews.

Mr Brearley told the House of Commons business select committee on Tuesday that volatility in energy markets had worsened since Russia's invasion of Ukraine and that there was little sign of a sustained retreat in prices.

“We are expecting a price cap in October of £2,800,” Mr Brearley told the committee, adding that he would send a letter to Mr Sunak later on Tuesday. Ofgem has already raised the annual price cap to £1,971 in April. At the end of 2020 it stood at £1,042.

Energy suppliers have warned that 30- 40 per cent of households could end up in fuel poverty in the coming winter.

Analysts said a levy on electricity generators would also hit several large foreign-owned energy companies, including ScottishPower, a subsidiary of Spain's Ibedrola, France's EDF Energy and Germany's RWE.

The proposed wider windfall tax would also include smaller generators that benefited from an early subsidy scheme to encourage the construction of low-carbon energy generation, which are thought to have profited handsomely from high wholesale power prices.

Investing in renewables

But business secretary Kwasi Kwarteng distanced himself from an energy windfall tax on Tuesday, telling the committee that he had been very clear in his opposition to it not least as it could harm UK efforts to hit its 2050 net zero target by discouraging generators from investing in renewables.

Oil and gas producers also criticised plans for a levy. Linda Cook, chief executive of Harbour Energy, the biggest oil and gas producer in the North Sea, told a conference in Aberdeen that additional taxes "would be detrimental to energy sector investment levels, to our domestic energy security and to our sector's ability to further the country's energy transition ambitions".

Executives are privately resigned to the likelihood of a windfall tax. “We are probably in the situation where it is inevitable,” said one.

Shell chief executive Ben van Beurdentold the company’s annual shareholders meeting that there are “good ways and bad ways of designing a tax structure and if you do it in a bad way it can discourage investment”. He said the way the existing supplementary charge was designed would allow companies such as Shell, which invest in green projects, to offset investments in renewables against the expected levy. – Copyright The Financial Times Limited 2022