While there is a clear need to address energy-led inflation, an intelligent framework can support voters’ need to pay higher bills at the same time as tackling the climate crisis and transitioning the UK economy from a reliance on thermal generation to renewables. The two are not mutually exclusive.
The spectrum of commentators on energy windfall taxation is wide: from those that think it a necessary tool for redistributing excess energy profits to those that believe windfall taxes disincentivise investment and further complicate tax policy. Policymakers are also presented with an unenviable minefield as they balance soaring inflation, which will impact the vulnerable most, while positioning the UK as a good place to do business.
The problem is compounded by two factors. The first is public popularity for the measure: people need help to pay their bills. The second issue is the UK’s commitment to net zero and the Paris Agreement, as well as its position globally as an economy at the forefront of the transition away from carbon intensive industries. Ultimately, this is a balance between meeting an immediate need and a need that, while further away, requires immediate action.
Turning to the oil and gas sector as a means for additional tax presents as a potential solution. The majority of profits in this sector are still too readily reinvested in non-renewable initiatives. Commitments to renewables have been made, but the proportion of operational expenditure in projects focused on net zero is disproportionately low. Rechanneling some of that to ease society’s ills is arguably a good use of money.
The popularity of such windfall taxes has, however, seen the conversation turn from oil and gas to utilities. Bucketing these two sectors together appears to be an easy thing to do; when energy prices are high, they are both seen to be profiting as individuals and businesses suffer. But this is an overly simplistic analysis which fails to take into account several factors including the prevalence of longer-term, volatility-lowering, power price contracts and hedging strategies.
It creates a material risk that we may begin taxing businesses in the utilities sector which are among the greatest drivers of the UK’s transition to a more sustainable future.
Nuance is desperately needed. The UK’s utilities businesses may not have the ‘new world’ appeal of Tesla or make up the foundations of consumer consciousness, like Zoom, but they have a profound impact on driving the UK to be among the first to transition to a net-zero economy, while also playing an enormously important role as global innovators when it comes to renewable energy generation and security.
SSE is one such firm that is in peril of being tarred with the same brush as oil and gas. SSE is the developer of the largest wind farm in the world and is currently in the process of designing and constructing a pumped storage hydro project that would more than double the UK’s existing electricity storage capacity. One in five new staff at SSE come from industries that are adversely affected by the energy transition. These individuals have, in many cases, been retrained and reskilled to contribute to the renewables sector and the UK’s green economy.
These initiatives do not simply come courtesy of increased energy prices. SSE has already set out a highly ambitious £24bn investment plan in the UK, investing significantly more than it makes in profit in order to come good on its commitment to renewable energy in the UK.
Yet from an investment perspective, tax intervention would risk redirecting capital already ear-marked for a long-term solution, leading to increased uncertainty that could raise the cost of capital for the industry. In our pursuit of energy security of supply and independence, we have to ask ourselves, is this the type of innovation that we want stymied by short-term taxation measures?
David Osfield is fund manager of the EdenTree Responsible & Sustainable Global Fund