The UK Government plans to scrap windfall tax on energy firms if prices keep falling – but is it too little, too late?

The UK government announced in June that its windfall tax on the oil and gas sector will not be applied if prices drop below certain levels for six months in a row due to a new price floor mechanism.

As EID has previously explained, the windfall tax (formally known as the energy profit levy) was introduced in May last year and increased from its initial 25 percent to 35 percent in November.

The recently announced Energy Security Investment Mechanism will be triggered when oil reaches $71.40 per barrel and gas reaches $0.69 per therm for a period of six months. The change would take the current 75 percent tax rate on the industry back down to 40 percent.

When introducing the mechanism, a No 10 spokesperson stated the following:

“To protect domestic energy supply and safeguard thousands of jobs reliant on that sector, we’ve introduced the energy security investment mechanism, and that means that if oil and gas prices consistently fall back to normal levels before March 2028, which is when it would end anyway, the energy profits levy would be switched off.”

However, independent price forecasts by the Office for Budget Responsibility suggest the mechanism is unlikely to be triggered before the windfall tax’s planned end date in March 2028.

In response to the price floor mechanism, Chief Executive of Offshore Energies UK, 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…enabling continued UK energy production now and in future depends on a predictable and fair fiscal environment. The UK must be competitive if we are to be successful in the global race for energy investment.”

The damage may have already been done. On the same day that the price mechanism was announced, a major North Sea producer announced an end to UK drilling. Other North Sea producers have accused the Government of making “pointless” changes, warning that jobs and investment are still at risk.

Recent analysis published by Wood Mackenzie claimed that the North Sea windfall tax is likely to net 20 billion (£16 billion) for the UK Treasury, about 60 percent less than original government projections. When the increase of the tax was announced in November, the Treasury forecast it would bring in up to $52 billion (£41.6 billion) up until 2028.

Graham Kellsas, Wood Mackenzie’s head of fiscal research, said that the windfall tax had been badly designed as it had undermined confidence in the sector while being relatively slow to raise revenue. Kellas continued:

“The government’s prediction of how much they get over the entire period of the windfall tax is going to be much less, whereas the money that they’ve spent — that these taxes were designed to cover — has already largely gone out the door.”

Bottom line: While the price floor mechanism is a welcome move, its actual impact is expected to be limited. Furthermore, given the tax will no longer raise the funds the UK Government initially expected, its financial benefit and assistance to consumers will be limited. The UK’s windfall tax should serve as a warning sign of how taxes like these can have a sizeable negative impact to everyone in the industry.

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