Rishi Sunak’s government has vowed to end the windfall tax on oil and gas companies if prices continue to fall, in a move branded “premature” while millions across Britain continue to struggle with the cost of living.
Ministers said the tax has raised £2.8bn, and that it will soon have saved a typical household £1,500 on energy bills since it was imposed last May to fund support for consumers and businesses as prices rocketed following the pandemic and Russia’s invasion of Ukraine.
But despite the chancellor, Jeremy Hunt, raising the tax to 35 per cent and extending it until 2028 just months ago – a move he claimed would raise £40bn – the government appeared to bow to industry pressure on Friday as it announced a plan to end its energy profits levy.
Under the new plans, ministers will now axe the levy if the average price of oil falls below $71.41 (about £57) per barrel for two consecutive quarters and the average price of gas falls below 54p per therm.
The decision was met with criticism on both sides. The fossil fuel industry, which has enjoyed record profits in recent months, said it did not go far enough, while poverty campaigners and opposition MPs lamented the potential loss of the tax – which they said “already contains more loopholes than a block of Swiss cheese”.
But the government insisted that, despite its inclusion of a controversial “investment allowance” aimed at encouraging further fossil-fuel extraction in the UK, a blanket imposition of the levy until 2028 poses a threat to the long-term future of the UK’s domestic energy supply as firms threaten to cut back investment.
However, if the Office for Budget Responsibility’s energy price forecasts prove to be accurate, the windfall tax will still remain in place for five years as planned, according to the government.
On Friday morning, Brent crude oil was trading at $75.38 dollars per barrel, while UK gas prices were at around 64p per therm – down from a 14-year high of nearly $140 per barrel and £8 per therm last March.
Petrol prices at forecourts hit nearly £2 per litre last June
That spike saw petrol prices at forecourts hit what was then a record high of £1.67 per litre. They now sit at £1.43, down from nearly £2 last June.
Meanwhile, UK regulator Ofgem’s energy price cap is set to return to £2,074 in July, after soaring from £1,277 in August 2021 to a high of £4,279 for a typical household, during which time consumers were shielded slightly by government support – partly funded by the windfall tax – which has now been wound down.
Defending the levy’s new floor, the exchequer secretary to the Treasury, Gareth Davies, said it was “so important that we secure investment in our own domestic supply” to protect jobs, as he warned that “never again can our energy supplies be at the whim of petrostate despots like Putin”.
But campaigners argued that ministers should “keep all options on the table” to bolster Britain’s energy security and help struggling households.
“Energy bills are predicted to remain high, and levels of household energy debt are still surging,” said Simon Francis of the End Fuel Poverty Coalition, which described the decision to end the windfall tax as “shortsighted”.
“Any talk of reducing or ending the windfall tax while millions still struggle through the energy bills crisis is premature. The government should keep all options on the table to ensure the funding is available to fix Britain’s broken energy system into the long term.”
The move is ‘shortsighted’ given uncertainty over how long Vladimir Putin’s war in Ukraine will rage and the state of the energy market
Liberal Democrat leader Ed Davey MP warned that families and businesses still suffering so much from high energy bills will not forget the Tories’ “failure” to “properly” tax oil and gas profits.
“This out-of-touch government has shown yet again that it doesn’t care about people struggling just to get by, or the small business clinging on,” he said. “This energy tax failure ranks as one of Rishi Sunak’s biggest personal failures.”
Despite the concession, which was pushed for by firms eyeing investment in the government’s controversial decision to develop Rosebank, the UK’s largest untouched oilfield, industry body Offshore Energies UK said it was not enough to restore confidence.
“We’ve always been clear that when the windfall conditions go, the windfall tax should go,” its chief executive David Whitehouse said. “This is a step in the right direction, but many more will need to be taken to restore confidence to our sector.
“We will now work closely with government and lenders to understand the detail of the measure and its effectiveness at unlocking investment.”
Climate campaigners are starkly opposed to developing the Rosebank oil field
Labour, which has pledged to honour any new oil and gas licences if they are granted – but opposes new developments – insisted that the UK needs “a proper windfall tax on the enormous profits of oil and gas giants to help ease the cost of living crisis”.
“We will look at the detail of this change,” a spokesperson said. “Of course, if the windfalls of war disappear, then we’ll look at what the right long-term tax position should be for the North Sea.”
More than 10 million people in the UK are now struggling to pay their bills, according to a recent Financial Conduct Authority study, with some eating less and cancelling insurance policies in order to get by.
While the government wound down its energy bill support scheme in April, millions of households on low incomes are to receive further support to meet the cost of living, worth up to £1,350 in total this year. You can read about the help available in June here.
