Shares in UK power companies slide over fears of windfall tax

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

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 morning trading in London on Tuesday.

The sell-off came after the Financial Times revealed that UK chancellor Rishi Sunak had ordered officials to widen the scope of a potential windfall tax, which could raise billions to help households with the soaring cost of living.

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 including other companies in the energy supply chain as domestic energy bills have soared.

Analysts warned that a potential windfall levy on electricity generators would hit several large energy companies, including Spanish-owned ScottishPower, France’s EDF Energy and Germany’s RWE, all of which own significant power generation assets in the UK, including wind farms, solar schemes and nuclear plants.

A wider windfall tax would also include smaller owners of projects 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.

Investec’s energy analyst Martin Young warned, however, that a windfall tax on electricity generators could “jeopardise much-needed investment” in low-carbon assets required to meet government renewables targets and to achieve the UK’s 2050 net zero ambition.

He added that ministers should be “careful what [they] wish for”.

Deepa Venkateswaran, an analyst at Bernstein, said many larger renewable energy companies struck long-term contracts to sell their output at a negotiated price and therefore had not profited from the highest wholesale power prices.

Oil and gas producers on Tuesday mounted their strongest attack yet against a windfall tax on their industry. Linda Cook, chief executive of Harbour Energy, the biggest oil and gas producer in the North Sea, told a conference in Aberdeen that “there can be no doubt that an imposition of 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”.

However, oil and gas executives are privately resigned to the likelihood that a windfall tax will be imposed. “We are probably in the situation where it is inevitable,” said one executive with knowledge of the situation.

Oil and gas companies are pushing the Treasury and Downing Street to ensure that any windfall tax imposed will be administered using “known mechanisms” — for example by increasing the 10 per cent supplementary charge on their profits. In 2011, the then Conservative chancellor George Osborne raised the supplementary charge to 32 per cent from 20 per cent at the time.

“Tax rates go up and down. The ideal is there is no windfall tax but we have probably gone past that point,” added the executive.

Dan Alchin, director of regulation at Energy UK, said that generators had invested billions to help transform the country’s energy system, and were “ready to deliver billions more to help the country reach its climate change targets”.

“We need to be careful of any actions that could inadvertently jeopardise the pathway to energy security, net zero and reliable low-cost electricity,” he said.