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UK tax capture on earnings power likely to struggle with complexity – Financial Mail

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(Bloomberg) — The United Kingdom has left the door open for an unexpected tax extension on power generators, but it’s an option seen as difficult to implement and a threat to green investment.

A government official said in response to an article in The Times that there were no timings for such a measure, and it could happen within weeks. The idea of ​​a dividend tax on energy producers was floated early this week, but it fell short of Thursday’s 15 billion pounds ($19 billion) energy policy package, which included an unexpected tax on oil and gas companies.

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The tax on energy profits can be particularly complex as generators sell most of their production up front, meaning that the impact of higher prices has yet to be felt by many operators. Also, some fossil fuel stations only operate when needed to fill in supply gaps when it’s not windy, briefly earning very high prices for the service. Another concern is that unexpected fees will discourage investment in the technology needed to transition to a low-carbon economy.

“Designing a viable, fair and proportional mechanism will be very challenging, and will most likely be subject to a legal challenge if implemented,” said Martin Young, analyst at Investec Bank Plc. “The prospect of an unexpected generation tax is something we firmly believe is a negative step on the path to net zero and, if implemented, will cost consumers by increasing the returns required for investment.”

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Treasury Secretary Rishi Sunak said Thursday that more work needs to be done on the idea.

It is not clear whether renewable generators will be included or not. While oil and gas producers got tax breaks for new projects to cushion the impact of the 25% windfall tax, no concessions were made to invest in wind farms in the North Sea. Prime Minister Boris Johnson has set a goal of tripling offshore wind capacity and cannot afford the investment.

The government said it stopped short of imposing a tax on electricity producers because it was consulting on measures that could reduce the impact of rising natural gas costs on record-high electricity prices. These reforms could include changing the marginal pricing model, whereby energy prices are determined by the most expensive generation technology – gas currently.

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While most energy producers have sold their production up front, they can still break deals and resell much closer to real time. Either way, it is consumers who are paying very high prices and the profits to renewable and nuclear generators far exceed the cost of producing them, according to Rob Gross, director of the UK’s Energy Research Centre.

Renewable and nuclear generators, which are not subject to high fuel input costs, “may enjoy windfall profits over the next two to three years,” according to Peter Besztega, research analyst at Bank of America. We will not rule out imposing such a tax in the future.

It was also not clear how the UK energy support package would be funded, Ahmed Farman, an analyst at Jefferies Group LLC, said, which “augurates risks for UK power generators”.

If the windfall tax comes with relief on new investments similar to that offered to oil companies, it could provide some shelter for utilities with big spending plans like SSE Plc, RWE AG and Iberdrola SA. He said Drax Plc and Centrica Plc would be most at risk.

© Bloomberg LP 2022

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