The Government is determined to prove to the world that Britain isn’t a serious country
The windfall tax sends a message to investors that the UK is not a place capable of making difficult trade-offs to fix our energy mess
There’s a way to do a windfall tax in a minimally damaging way, and this isn’t it. The case for one, in the circumstances, is not unreasonable. Energy companies are sitting on vast, exceptional profits generated by geopolitical accident and the crazy way our regulations price electricity.
If it was going to raid this cash pile, the Government ought to have said so months ago and accompanied a one-off tax with a package of measures designed to get money flowing into British oil and gas prospects. It has, of course, done the opposite, and announced an open-ended levy alongside few measures to encourage investment. BP, which had said it wouldn’t mind a tax, has instead begun to review its North Sea investments.
It should be obvious why. The Government isn’t taxing energy firms because ministers think this will benefit the economy or raise revenue efficiently. They are doing it because they think it’s popular and politically convenient. It takes attention away from Boris Johnson’s transgressions and outflanks Labour to the Left. In other words, it is a decision based on the most parochial and self-serving of reasons.
In the outside world, we are at the start of what Goldman Sachs is calling “the return of energy investment”. After seven years of famine, which has seen the world’s known oil and gas reserves halve, the industry is now set for a feast. There is a major limiting factor, however: there are only so many rigs in the world capable of drilling underwater and the cost of leasing them has gone through the roof.
So why would any company pay through the nose to drag one all the way to the North Sea so they can be demonised by climate protesters, taxed at random by grasping politicians, starved of capital by our regulators, tied up in planning for any onshore kit they require and forced to sell their assets on the cheap to China when gas prices fall? Most of them, I imagine, would rather make a barely taxed killing in the Gulf and then take tea with royalty in its air-conditioned palaces.
Britain, in truth, is never going to be the top destination for new oil and gas investment because it’s unlikely we have any unexploited super-massive reserves left in the North Sea. But the Government could be doing a lot more to make the most of the assets we do have left while getting on with its revived nuclear power programme. The investment allowance built into Rishi Sunak’s super-tax is a start. But what companies really need is some degree of security, so that when they make the very risky, long-term investments needed to find and extract Britain’s remaining gas, they stand a chance of making some money in the process.
This might sound perverse to a public accustomed to the image of a stinking rich oil baron cashing in on destroying the planet, but finding gas buried miles underground and getting it into our pipelines is actually a very precarious way to make a profit. Just ask Cuadrilla, the small company trying desperately to make a go of British shale. Aside from the technical risks inherent in looking for gas that may not be there or may not be extractable if it is, our political and regulatory system loads further uncertainties onto companies.
One of the most important is that our gas is priced at the spot price, which is to say that even though companies often plan and operate for years before getting hold of any gas to sell, they are then forced to sell it at whatever the going price is on the day. This is because successive governments, in their wisdom, oversaw a phasing out of long-term pricing contracts after the privatisation of British Gas in the 1980s. The idea was that if we built plenty of import terminals, then international competition would always drive the price down, so it would be better for consumers not to guarantee a price up front. It hasn’t exactly worked out like that.
Instead, because we inevitably at some point entered a period of rising prices, we have ended up with a price cap for consumers and a volatile market price for producers. In between, a whole load of “innovative” small suppliers have gone bust, shunting their customers onto the books of the big companies everyone dislikes. This means that we have the worst of all worlds: spiralling costs for households, but still limited incentives feeding through to the corporate decisionmakers who might actually explore for new gas. They look at the UK and see not a profits bonanza but a market beholden to political fads and regulated in all the wrong ways.
The spot price mistake has been compounded by another big government policy error: the closure of large-scale UK gas storage facilities – an error highlighted in 2017 by Oxford economist Dieter Helm in a paper the Government itself commissioned and then ignored. The Government was still stuck on the idea that building lots of import capacity meant we wouldn’t need storage because the world was our storage tank. This has led to a ludicrous situation today in which the UK is being flooded with cheap gas from abroad – so much that it cannot fit through the pipelines into Europe – but has no way to store enough of it to help us through the winter. The lack of storage also makes it difficult to encourage companies to strike long-term supply contracts. It’s just another way in which stability and predictability have been stripped out of the system.
And then there’s the effect of the climate campaign. We are all familiar with the image of oddly dressed protesters chaining themselves to lamp-posts. This nuisance pales in comparison to the planning system, however, which can tie up companies for years over the most minor and basic pieces of infrastructure. Our Government, in its usual pathetic way, only ever overrules these Nimbys when faced with the most acute political pressure.
Even further behind the scenes than the planning system, our financial regulations are themselves being designed with the aim of stifling new investment in oil and gas. With little thought for the effect on energy security, the Treasury last year handed to the Bank of England the poisoned chalice of building “climate resilience” into the financial system. In effect, this means that banks will be penalised for lending to oil and gas companies. Where, then, does Mr Sunak expect these companies to get their capital from? China?
It is one thing to levy an extraordinary tax in extraordinary times. It is quite another to do what our Government has just done, which is send a message to investors, loud and clear, that this is not a country capable of making difficult trade-offs to fix our energy mess. It is a dithering posse panicking over yesterday’s headlines. As for tomorrow’s, at this rate they will almost certainly be someone else’s problem.