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UK energy: tilting at windfalls puts investment at risk

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Boris Johnson talked of making Britain “the Saudi Arabia of wind”. Now his government risks taking the wind out of the renewable sector’s sails. News of a possible tax on the excess profits of electricity generators, including wind farm operators, has rocked the industry. But it will be harder to pile extra taxes on to green energy companies than North Sea oil and gas producers.

Share prices of big energy companies slumped on Tuesday. The market value of Perth-based SSE fell 7 per cent. Centrica, which is exposed through its nuclear and North Sea businesses, dropped 9 per cent. Drax, which operates a wood-burning power plant, crashed 16 per cent.

Gas sets the price for the bulk of UK electricity, despite producing only 40 per cent of it. Most renewable generators receive subsidies. By contrast, the minority covered by the more recent Contracts for Difference (CFD) scheme are already due to hand back gains from the higher gas price, a sum expected to reach £660mn by 2023.

Clawing back the gains from the rest, however tempting, would be difficult. The mooted £10bn of excess profits looks fanciful. Generators sell forward for up to three years. Defining excess profits would be hard. ScottishPower UK, part of Spain’s Iberdrola, reported a fall of more than a third in last year’s operating profit margin to 12 per cent, partly because calmer conditions reduced wind yields. Similarly, EDF was hit by unplanned outages of nuclear plants.

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There are broader reasons a government should forswear windfall taxes. The need for such levies is always cited as exceptional by proponents, and is therefore nothing of the kind. They are asymmetrical: investors do not get one-off rebates when prices are low. They increase uncertainty and with it a nation’s cost of capital. That deters investment.

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As governments try to raise domestic energy production, multinationals are spoilt for choice over where to invest. Windfall taxes would make the UK’s net-zero ambitions even harder to achieve. The government should brave populist wrath and rule them out.

The Lex team is interested in hearing more from readers. Please tell us what you think of plans for UK windfall taxes in the comments section below

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