Government sets end-date for UK’s oil and gas ‘windfall tax’

The Treasury has today (9 June) stated that it will only wind back the Energy Profits Levy, which taxes fossil fuel companies at 75%, when energy prices “consistently return to normal levels for a sustained period”. This is defined as a maximum of $71.40 per barrel of oil and 54p per therm of gas.

It does not believe that this will be likely until the winter of 2027 – 2028. This means it will keep the Levy in place until March 2028.

When the Levy is removed, the Treasury will replace it with a new ‘Energy Security Investment Mechanism’ that will trigger a decrease in tax rates to 40%. This is the level that taxation had been at before the price crisis.

The decision indicates that the Government is bowing to industry pressure – potentially at the expense of its own legally-binding climate targets.

The Treasury said in a statement: “While the levy included an investment allowance to encourage firms to continue to invest in oil and gas extraction in the UK, industry has warned that companies are cutting back on investment. This puts the long-term future of the UK’s domestic supply at risk.”

The investment allowance, at its highest, enabled companies to claim back up to 90% of their tax rate if they were investing in new exploration and capacity. This angered environmental groups, who pointed out that the International Energy Agency has repeatedly stated that oil and gas expansion is incompatible with achieving the Paris Agreement.

Renewable energy developers have also been disappointed, as the investment allowance was not open to them. Coupled with other market issues such as supply chain disruption and long grid connection waiting times, renewables firms warned that global investors would be minded to look overseas.

Reacting to today’s news, the Association for Renewable Energy and Clean Technology’s head of power and flexibility Mark Sommerfeld said: “Once again, the Government are focusing tax cuts on fossil fuel producers, while the equivalent windfall tax on renewables, called the Electricity Generator Levy (EGL), remains unchanged. Today’s announcement for the Energy Security Investment Mechanism will reduce the tax liability on oil and gas producers when energy prices return to consistently normal levels, however, will not apply to renewable generators, despite a harsher tax on low carbon generation. 

“Furthermore, the Government have repeatedly ignored calls to introduce a dedicated Investment Allowance for renewables, which would promote low carbon investment, despite the equivalent allowance again already being in place for oil and gas.

“Government is presenting today’s announcement as necessary for delivering energy security, yet it is not applying these benefits to the cheapest forms of domestic electricity generation, which also happen to be critical to delivering a decarbonised electricity system.”

Energy bill support

To date, the Energy Profits Levy has raised some £2.8bn. It will raise a cumulative total of £26bn if it runs through to March 2028 as expected.

Funding raised through the Levy has helped the Government to subsidise energy bills for homes and businesses.

Earlier this week, the Treasury revealed that just under £40bn has been paid out in energy bill subsidies to date. Around £2,500 was shelled out every second since October 2022 to keep energy costs down.

The UK Government has been urged to invest more heavily in energy efficiency and renewable energy to help reduce the need to subsidise energy costs in the future. At present, a new Energy Bill is passing through Parliament.