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Sunak’s Tax Helps Consumers But Misses the Energy Mark

A misguided levy overlooks pressing needs, such as storage and energy-inefficient buildings

Sunak’s Tax Helps Consumers But Misses the Energy Mark
Sunak’s Tax Helps Consumers But Misses the Energy Mark

The UK government’s 25% windfall tax on oil and gas company profits, along with the accompanying investment allowance that will let them avoid most of it, will do little to address the country’s pressing energy needs.

Speaking in parliament on Thursday, Chancellor of the Exchequer Rishi Sunak, didn’t dare utter the words “windfall tax” — something the opposition parties had been urging him to impose for months —  referring to it instead as a special levy. It amounts to the same thing. The tax will remain in place until oil and gas prices return to “historically more normal levels,” although he gave no hint as to what those levels might be.

The grants to households that accompany the tax are undoubtedly welcome, and much needed by people facing another hefty increase in their fuel bills later this year.

To soften the blow for companies, he also announced an investment allowance that will permit them to offset 80% of the tax through new investment in the North Sea. But that won't help future-proof the UK energy system.

Investment in new energy supplies typically have long lead-times. It doesn't matter whether it’s North Sea oil and gas fields, micro nuclear power plants, or wind farms. We're talking years, not months, before an investment idea translates into significant new supplies.

There are two things the country needs desperately ahead of more oil and gas production.

1. Storage capacity for natural gas

The UK has nowhere to store natural gas in the summer months to help meet peak winter demand. With gas a common fuel for home heating, demand is highly seasonal. Winter use is typically more than twice as high as during the summer.

Sunak’s Tax Helps Consumers But Misses the Energy Mark

Until five years ago, the UK stored gas for winter use in a depleted field in the North Sea, called Rough. Withdrawals from storage met about 10% of the UK’s gas demand in the winter of 2014 to 2015, with Rough accounting for about 70% of that.

But that facility was closed in 2017, when its owner, Centrica Plc, decided it was too expensive to repair technical faults that had plagued the site after more than three decades of operation. The decision was good for Centrica, less so for UK energy security.

The government at the time was unconcerned about the loss of the country’s only major storage site. The UK’s Department for Business, Energy and Industrial Strategy saw no risk to the nation’s energy security amid rising production of liquified natural gas (LNG) in the US and Australia, among other increases in supply. That complacency now looks misplaced.

Successive governments since then have been unwilling to provide incentives for a replacement, leaving the UK exposed to the whims of spot prices. That’s fine when supplies are abundant, but not when they’re severely constrained, as they were last winter and may well be in the coming one.

Sunak’s Tax Helps Consumers But Misses the Energy Mark

In the past few weeks, the UK has agreed to import so much LNG that it has more than it can use — and nowhere to store it when it’s delivered. The UK’s gas price is now a third lower than continental Europe’s, as the market adjusts to the over-supply. Were Rough still open, or replaced with a new facility, the excess supply could be stored until it’s needed, as it is across Europe. Without it, next winter’s gas crisis will be partially self-inflicted.

2. Urgent action on energy efficiency

The support for new oil and gas investment also undermines the COP26 climate agreement reached in Glasgow just six months ago. The gathering, hosted by the UK, called on countries for the “phaseout of inefficient fossil fuel subsidies.”

Tackling energy waste through upgrading a poorly insulated building stock would do more to help households cut fuel bills than investing in more North Sea oil and gas. The impact would start to be felt much sooner and would last for much longer. Improved insulation and more efficient boilers, (or heat pumps once fuel taxes are revised to penalize carbon-heavy natural gas more than electricity that is increasingly carbon-free) would cut bills and reduce gas use for decades.

Meanwhile, oil and gas discoveries in the UK North Sea are getting smaller and the production from them is lasting for correspondingly shorter periods. Any benefit to security of supply will be fleeting. 

The government could have set up an energy efficiency fund, with tax offsets for payments into it by the oil and gas industry, to provide grants and subsidies for building improvements. That would have been a far more beneficial approach than breaking the promises made just six months ago at COP 26.

More From This Writer and Others at Bloomberg Opinion:

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  • Russia Needs Cash More Than Europe Needs Its Gas: David Fickling
  • Sunak's Helicopter Drop Makes BOE's Life Easier: Marcus Ashworth

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg First Word. Previously, he was a senior analyst at the Centre for Global Energy Studies.

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