Windfall tax calls intensify as energy bills fuel inflation

The increase would allow firms such as Glasgow-based ScottishPower to recoup the cost of sharp increases in gas prices on wholesale markets fuelled by the recovery from the pandemic followed by the fallout from the war in Ukraine.

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Following a £693 increase in the cap from April, to £1,971, the 22 million consumers concerned could see their bills increase to around £2,900.

Mr Anderson has made it clear he thinks a crisis is looming and that ministers need to act fast to head it off.

He has said the support offered by the Government to date is not going to be anywhere near enough to support struggling households.

Rishi Sunak’s decision to offer £350 relief has been widely criticised, not least because £200 of that will effectively be in the form of a loan. The remaining £150 will be provided through the Council Tax system, meaning it could be hard to claim for many people.

“Given what’s going to happen in October, we think that urgent action is required to put in place a mechanism to support customers through this period,” said Mr Anderson on Monday.

“You require a sum of about £1,000 to start bringing bills back closer not to where they used to be, but closer to where it’s realistic to expect people to be able to pay them.”

Under Mr Anderson’s proposal around 40% of UK households would get the £1,000 support. The idea will probably sound reasonable to many. It allows Spanish-owned ScottishPower to be seen as an agenda-setting partner in the quest for a fairer energy system in the UK.

Mr Anderson has suggested a social tariff could be used in place of the price cap.

ScottishPower chief executive Keith Anderson

However, ScottishPower has proposed that the costs involved could be recovered through an additional levy that would be imposed on the bills of all households when conditions normalise. That would mean households paying around £40 extra a year for a decade.

But this would simply mean that the pain resulting from price increases will be spread over a longer period rather than avoided.

It might be possible to come up with a way of ensuring the most vulnerable are protected but the design and implementation of such a plan would take time that Mr Anderson insists we don’t have.

Given the need to come up with a fair solution fast, calls for the Government to make energy firms pick up the bills involved are likely to get louder even if Boris Johnson appears to have ruled out imposing a windfall tax on oil and gas companies.

In the wake of Shell and BP both posting massive increases in first quarter profits last week, the chairman of Tesco John Alan told the BBC there was an “overwhelming case” for such a tax to be imposed on energy producers.

On Wednesday North Sea-focused Harbour Energy said it expected to expects to generate up to $1.7 billion (£1.3bn) cash flow from its operations this year, after planned dividend payments of $200m and tax charges.

Firms that supply energy to households may argue that it would be unjust to impose a windfall tax on them because they aren’t making money in that market.

READ MORE: Scottish Gas owner on course to achieve earnings at top end of expectations 

ScottishPower said it lost £12m in the household supply business in the first quarter. This reflects the lag between gas price rises on wholesale markets and the increase in the cap on bills.

Big players such as ScottishPower have taken on loss-making business from the raft of firms that have gone bust in recent months, under the Supplier of Last Resort system.

The carnage raised big questions about the design of the cap and the behaviour of Ofgem. A review commissioned by Ofgem which was published last week noted its approach “created the opportunity for suppliers to enter the market and grow to a considerable scale while committing minimal levels of their own equity capital”.

However, companies that act as Suppliers of Last Resort can pass the associated costs on to their own customers.

The difficulties faced in the last quarter should not obscure the fact that firms have made big trading profits in the household supply business in recent years.

ScottishPower’s retail arm made £222m profit in 2020, on the EBITDA (earnings before interest, tax, depreciation and amortisation) measure used by the parent Iberdola group. Earnings fell to £3m last year but that was partly because low windfarm output meant ScottishPower had to buy more gas than expected on wholesale markets.

A ScottishPower spokesperson said the retail business lost £41m net of all costs in 2020 and £279m last year.

Firms’ activities in other parts of the energy system, such as generation and transmission, have remained very profitable.

ScottishPower’s generation and networks businesses made £250m each on an EBITDA basis in the first quarter, up 20 per cent and 6% year on year respectively.

The returns ScottishPower makes in the renewable energy generation business are effectively underpinned by the Government under the Contracts for Difference scheme. This was developed to encourage investment in windfarms and the like in the days when it could be considered high risk. The regime remains in place although the market and associated technologies have matured.

Iberdrola said first quarter highlights included ScottishPower’s success in the ScotWind leasing round. ScottishPower was awarded three areas of seabed off Scotland, including two with Shell.

The returns that firms are allowed to generate in the networks business are set by Ofgem.

With the arguments in favour of energy groups paying more tax becoming stronger, the likes of ScottishPower may be grateful that oil and gas giants could look like more tempting targets.

Scottish Gas owner Centrica, which has a North Sea production business, said on Tuesday that it expected annual earnings to be at the upper end of expectations.

Oil companies’ claims that such a levy would deter firms from investing in the North Sea at a time when the UK wants to reduce its reliance on imports are sounding increasingly strained amid the bonanza in the area.

Even if the Government accepts those arguments and rules out a big increase in taxes it could modify the reliefs provided to help the industry respond to the slump that started in 2014, which the SNP Government in Scotland pressed for. Just like the Contracts for Difference system, these may now be overly generous.