A leading energy sector lawyer has warned that a windfall tax on North Sea profits could do more harm than good.
The average household energy bill is set to rise to around £2,000 per year after Ofgem announced that the energy price cap will rise by £694 from April – a move driven by the surging price of gas on the international markets.
Labour and the Liberal Democrats have been calling for a one-off levy on the profits of energy companies to help tackle the UK's cost of living crisis.
Chancellor Rishi Sunak is against the move, saying he doesn't want to deter investment in the North Sea. The SNP has also abstained on Westminster votes on the scheme, with one MP dismissing it as a “smash and grab” on the industry.
Measures need 'great care'
Shirley Allen, an oil and gas partner at international law firm Pinsent Masons, said efforts to mitigate the looming hike in household energy bills should be welcomed, but the decisions on how to fund such measures "need to be taken with great care".
"The North Sea oil and gas industry has grappled with similar policies before," she said.
"But experience shows that, while well-intentioned, a windfall tax on providers could actually do more damage than good. The Treasury might reap a short-term gain, but the energy industry – and, ultimately, consumers - could be left to deal with the long-term pain.
"Part of the concern lies in the question of who ends up paying the tax. If the burden falls on shareholders, then millions of ordinary people will foot the bill through pension funds, savings and insurance policies that have investments in the oil and gas industry.
"Alternatively, if the tax forces energy companies to increase prices, then it is their customers who will ultimately pay – the very people that the proposed windfall tax is intended to help."
Protect net zero investment
The oil and gas sector’s profits are already taxed at a rate of 40% – more than double that of any other sector of the economy – and owing to the rise in the price of gas, HM Revenue & Customs (HMRC) is set to take in an additional £3billion from providers in the two years since last April.
Offshore industry body OGUK said earlier this year that a rise in gas or oil prices “always means a bonanza for the UK Treasury.”
And with the UK energy sector in the middle of a seismic shift towards net zero carbon emissions, Ms Allen cautioned against the syphoning of funds which could fund new, green projects.
She added: "A windfall tax could also risk stifling research and development funding for new lower carbon energy business lines and see money earmarked for capital expenditure projects diverted into paying the new levy."