Danni Hewson, AJ Bell financial analyst, comments on the effects of a windfall tax:
“There’s been plenty of speculation that the pressure to do more to help beleaguered families cope with the cost-of-living crisis might result in the government casting aside its political objections and imposing a tax on the windfall profits being enjoyed by oil giants. Reports that the policy is not only imminent but that it may also impact even green energy producers has sent share prices tumbling today. SSE, Harbour Energy, Drax, Centrica and Greencoat UK Wind are all down as investors weigh up the impact of such a tax.
“The arguments for are obvious and given more credence on the day that the boss of energy watchdog Ofgem sent chills through thermostat-watching households that the October price cap might go up by over £800. Grab a chunk of the profits generated by the current energy cash machine and share them out among people struggling to pay their bills would be a popular move and one that would silence the constant drumbeat coming from campaigners, opposition politicians and even Tory backbenches.
“But there are issues with such a tax. Firstly, how much cash would it actually generate, particularly when it has to be divided up amongst millions of needy households. Secondly, what damage might it do to future investment in an energy system that’s been in a state of flux for years. It’s telling that shares in both BP and Shell have only fallen back slightly today. Those companies have been under pressure for weeks, they’ve been warned such a tax would come their way if they didn’t ramp up investment in British projects to the satisfaction of the Treasury. But casting the net wider, including renewables, wasn’t something markets had factored in.
“The government has framed the disparate solutions to the current crisis in two ways, they can either doll out painkillers once or spend the money on surgical tools that can root out the problem for generations to come. The problem with the second option is if the pain gets too great, people just won’t want to sit patiently in the waiting room. Even if investment is made right now, this hour, it will take time for the benefits to be felt by UK households. And if oil and gas prices rise further the £800 increase warned of today will look paltry.
“But the government needs to bring business along for the ride because it’s not just about prices, it’s about security of supply and meeting green energy targets. Alienate companies and they’ll take their jobs and money elsewhere. If the government is to act, it needs to be open, honest and definitive, taxing the windfall but not the wind itself.”