Call for new windfall tax as Scots energy firms earn £1.5bn profits
Reports seen by The Herald on Sunday confirm price cap had little effect on earnings for SSE and ScottishPower
TWO key Scots energy firms have raked in over £1.3 billion in profits in the two years after the regulator brought in a price cap to protect consumers from soaring bills.
Financial reports made to Ofgem and seen by The Herald on Sunday, which include domestic electricity and gas supply as well as business, show the energy price cap has made little difference to the profits being made by the two major energy supplier players in Scotland – SSE and ScottishPower.
Together they made £1.3bn in cumulative earnings before interest and taxes (Ebit) over the last two full years since the cap was introduced in January 2019 – after making £1.1bn over the same period before it came in.
It comes as calls are made to impose a windfall tax on the profits of oil and gas companies as well as the biggest energy suppliers to help households and energyintensive industries to cope with higher fuel bills.
The Federation for Small Businesses in Scotland has made its own call for a price cap that benefits industry – the present one only helps consumers.
The introduction of the price cap for customers was an attempt by Ofgem to put an end to suppliers exploiting loyal customers and allow consumers to pay a fairer price for their energy. It was seen as a safety net for customers who do not regularly switch and who are on standard or default tariffs – typically a supplier’s most costly tariff.
Around 1.5 million Scots households will see their energy bills soar by up to £693 from April 1 after the regulator hiked the price cap by the biggest increase yet.
The Herald on Sunday can reveal that Glasgow-based ScottishPower took £477.7 million in its last full year (2020) from energy generation and supply – an annual rise of 87% (£223m).
It has accumulated earnings of £1.53bn over five years, having seen profits more than double over five years from £205.7m in 2016.
Perth-based SSE, which stopped having a commercial involvement in the domestic retail market in 2020 but still supplies business, made a £571.5m operating profit in its last year while supplying households in 2019/20.
It made £604.8m operating profit in 2020/21, its last full year when it was still supplying business customers – a record for any of the UK’s “big six” energy companies. That was a rise of £33.1m on 2019/20.
Over five years it has accumulated profits of £3.37bn.
Value for money?
THE details of the most recent profits before interest and tax have emerged in special filings given to Ofgem to provide a clearer picture of whether consumers are getting value for money.
The statements are required by Ofgem after the 2008 energy supply probe and aim to increase transparency of companies’ revenues, costs and profits.
The big six energy firms together have banked more than £7bn in operating profit over five years as the poorest households face a cost of living crisis.
It comes as an analysis from Energy Action Scotland has revealed that as many as 211,000 more Scots households are likely to be living in fuel poverty in the coming months in the midst of the cost-of-living crisis, a 43 per cent rise on 2019 figures.
The study, carried out by fuel poverty campaigner Energy Action Scotland, shows 57% of people living in the Western Isles will soon be spending more than 10% of their income on energy after housing costs have been deducted – the official definition of being fuel poor.
A further 11 local authority areas will see more than two in every five homes moving into official fuel poverty.
The study says the UK Government will tax average dual fuel households an extra £44 through higher VAT receipts, “heaping taxes upon those that can least afford to pay them”.
The charity is urging the UK Government to tax the excessive profits being made and wants a cut on VAT on energy bills. It says there should be a redistribution of the VAT windfall already received to help those with the lowest incomes, and consider radical reforms to ensure that vulnerable fuelpoor households are protected.
Frazer Scott, Energy Action Scotland chief executive said: “We have been calling for some time for the UK Government to tax the excessive profits being made by those benefiting from the high wholesale price of gas. Companies whose production and operating costs have been largely static while profits have increased at the expense of domestic energy customers.
“With over one in three households now in fuel poverty, the UK Government needs to act with greater resolve and greater impact if we are to avoid a humanitarian disaster when people will be unable to heat their homes and feed their families. The market and system is stacked against those most vulnerable and those on the lowest income. Far too little is being done.”
£1bn forecast
SSE UPGRADED its profit forecasts to nearly £1bn for its latest financial year as soaring gas prices more than made up for disappointing renewable energy output.
The FTSE 100 company runs gas-fired power plants alongside hydroelectric and windfarms, meaning it can make up for still periods by burning more gas – albeit at the cost of increased carbon dioxide emissions.
Experts say that has allowed it to take advantage of the tight global gas market, in which prices have quadrupled, adding to the squeeze on household incomes but providing a huge surge in profits for some of the UK’s biggest energy companies.
It’s time those making profits protected those suffering from high prices. A windfall tax should fund vital actions from abolishing fuel VAT to the reduction of standing charges
The Treasury has confirmed that it expects VAT revenue to actually drop as energy bills soar between now and October.
Answering a question from former Scots Cabinet secretary Kenny MacAskill, who is now deputy leader of Alex Salmond’s Alba Party, Lucy Frazer, financial secretary to the Treasury, said that if people spend more on energy where VAT is at 5%, they spend less on goods and services that on average have a much higher rate, thereby reducing tax revenue overall.
Mr MacAskill, who is backing a windfall tax on energy firms, said there are concerns that people will simply be switching their power off.
He says urgent action is needed such as reducing VAT to zero and the introduction of social tariffs to help those households in fuel poverty.
“Energy producers are making money hand over fist as prices rise. At the same time many poor and vulnerable are going without heating or power and most are struggling to readjust,” he said.
“It’s time those making profits protected those suffering from high prices. A windfall tax should fund vital actions from abolishing VAT on fuel to the abolition or reduction of standing charges. The need is great yet the profits to pay for it are there.
“Fuel is essential and should be rated like food, paid for by a windfall tax. The scale of the crisis isn’t just causing pain but will cost lives. Urgent action is needed and fast.”
‘Ease the burden’
THE Federation for Small Businesses in Scotland’s director of devolved nations, Colin Borland, said: “Small businesses are in a unique bind as energy prices rise to historic levels – they don’t have even the imperfect protection of domestic customers or the negotiating power of big corporate buyers.
“We’ve called for the price cap to include Scotland’s smallest businesses, but beyond this we want to see policymakers take meaningful steps to ease the financial burdens small businesses currently face.
“Whether this means extending Pay As You Grow to cover a wider range of loans, or cancelling impending rises in overheads – such as the hike in employers’ National Insurance contributions – we need to look at all available levers to give our smallest operators some desperately needed breathing space.”
Households in England, Scotland and Wales on default tariffs – such as standard variable tariffs – were expected to be better off after the cap was introduced in 2019. The cap limits the price a supplier can charge per unit of electricity and gas, and is reviewed every six months.
While it is intended to ensure customers pay a fair price for their energy, it is only a cap on the most expensive tariffs and does not safeguard against price fluctuations.
Households that use a default energy tariff to buy their gas and electricity can expect a sharp increase in their bills from April 1 after the regulator lifted its energy price cap.
Record gas prices
THE 54% rise, which will impact half the population, is said to be driven by a record rise in global gas prices with wholesale prices quadrupling over a year.
From April 1, the three in four customers on default tariffs paying by direct debit will see an increase of £693, from £1,277 to £1,971, while the rest who are on prepayment meters will see a rise of £708, from £1,309 to £2,017.,It will affect default tariff customers who haven’t switched to a fixed deal and those who remain with their new supplier after their previous supplier exited the market.
Industry analysts have warned that continued volatility in wholesale energy markets could push average household energy bills even higher – by more than £700 to £2,000 a year from April.
A spokesman for SSE said: “The SSE plc business is now wholly focused on delivering on our net-zero acceleration programme, investing £7m every single day in assets and infrastructure needed not only to help fight climate change and deliver net zero, but also to help lower future costs for consumers by reducing the UK’s reliance on volatile gas markets.”
A ScottishPower spokesperson said: “Energy bills are set and regulated by Ofgem and our retail business has made a loss in four out of the last five years. Through our renewables and networks businesses, over the past five years we’ve consistently invested between £1.5bn and £2bn per year, well in excess of our profits, on the very route out of this issue – doubling down on decarbonisation to support homegrown electricity generation and reduce the exposure to global gas. That’s where the focus needs to be, not cutting off net-zero investment which would only serve to cripple efforts to address the issue.”
A UK Government spokesman said: “A windfall tax could deter £14bn worth of opportunities awaiting investment, which would risk both security of our energy supply, as well as almost 200,000 jobs that rely on the industry.
“Oil and gas companies in the North Sea are already subject to a tax rate on their profits that is more than double those paid by other businesses. To date, the sector has contributed more than £375bn in production taxes.”