A British tax on electricity companies would not be entirely quixotic

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A British tax on electricity companies would not be entirely quixotic
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London’s plan against excess profits in the energy sector seems unfair and useless, but maybe it will win something

In it Quixote, the eponymous hero charges imaginary enemies that are actually windmills. Rishi Sunak’s attempt to raid the apparent £10bn (€12bn) of excess profits from the UK power sector seems equally misguided. However, the British finance minister is not likely to end up with totally empty pockets.

European politicians are desperate to show that they are doing something for citizens struggling with spiraling energy bills. But taxes on windfall profits have their complications. Although rising gas prices have pushed power from €50 per megawatt-hour at the end of 2020 to €200 per MWh a year later, many large utilities had already sold their electricity at lower prices. This belated confirmation forced the Spanish government to take a humiliating turn in its plans last autumn.

The SSE share’s 8% drop yesterday reflects investors’ fear that Sunak faces the same problem but hits UK utilities (including Iberdrola’s ScottishPower) anyway. According to him FT, the tax could be announced this week or in early June. Will be an error. SSE, worth £18bn (€21bn), is one of a number of companies investing heavily in renewable energy capacity to help reduce national carbon dioxide emissions by 78% by 2035. It also it would be unfair. Renewables players enjoy subsidies, but many contracts set the price they can charge, so any upside goes to the government. Between October 2021 and April 2023, this will cost the British treasury 660 million pounds (770 million euros), according to the independent advisory organization Energy and Climate Intelligence Unit.

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However, Sunak may still have some joy. Drax, the £3bn (€3.5bn) coal-fired power plant operator that now burns mostly biomass to generate electricity, saw its shares fall more than 15% yesterday. This is probably because it benefits from so-called renewable obligation certificates, a different kind of state aid that allows it to keep any rise in high energy prices. The 40% rise in its shares in the six months to yesterday reflects that its EBITDA this year, according to Refinitiv estimates, is likely to rise 50%.

It is difficult to calculate how much Sunak will raise. It will depend on how much the companies have sold in the future and the type of subsidies they receive. In any case, you may want to stick to North Sea oil. Bank of America studies suggest it could raise £2bn (€2.3bn) by increasing tax burden from 40% to 50% at a cost of just 2% of companies’ free cash flow in 2022. thus, it is unlikely that the amount that it can obtain from the electricity sector is zero.