MPs seek windfall tax on energy profits

By George Parker, Ed Crooks and Vanessa Houlder
Published: July 28 2008 00:04

There is a “compelling rationale” for a windfall tax on the profits of energy companies, MPs argue in a report on Monday.
They also claim businesses and households are paying excessive fuel bills because of failures in the British energy market.

Unless the energy market functions more efficiently, British companies will suffer falling competitiveness and there will be “serious consequences for millions of households, especially the fuel poor”, the report says.
The Commons business and enterprise committee calls on Ofgem, the regulator, to toughen its approach and – if necessary – to refer key parts of the energy market to a Competition Commission inquiry.
The MPs also lend their weight to calls for a windfall tax on energy companies, which were estimated by Ofgem to have benefited by £9bn from the free allocation of permits under phase two of the EU’s emissions trading scheme.
Political pressure for a windfall tax was reinforced on Friday when EDF, one of the “big six” suppliers raised its prices for the second time this year, by 17 per cent for electricity and 22 per cent for gas.
The other suppliers are expected to follow suit over the next few weeks.
Study findings
● Ofgem failed to investigate wholesale gas market, where producers were unwilling to trade in the forward market
● Government failed to invest in storage facilities to tackle dependency on gas imports
● Lack of liquidity in the wholesale electricity market, penalising new retailers
● Possible abuse of the market for SME electricity supply by the “Big Six” companies
Although the report disputes the £9bn Ofgem figure, it says “there is a compelling rationale for at least a one-off top-slicing of these gains to help fund action to reduce the energy bills of vulnerable families in the long term”.
Trade unions demanded a windfall tax during this weekend’s Labour Party policy forum, although Alistair Darling, chancellor, backed away from a windfall tax in this year’s Budget.
Mr Darling’s aides said the idea was still “an option” for this autumn’s pre-Budget report, although it was not receiving a great deal of official time. Gordon Brown has also promised action to address fuel poverty.
John Hutton, business secretary, unveiled an accord in April in which the “Big Six” power suppliers would commit an extra £225m over the next three years to help those in fuel poverty, de-fined as anyone who spends more than 10 per cent of their income on fuel bills. Poverty campaigners de-scribed the deal as “failing the most vulnerable”.
However, energy suppliers have argued that windfall taxes and other attacks on their profitability will damage the industry.
Duncan Sedgwick, Chief Executive of the Energy Retail Association, said on Sunday: “As the Committee acknowledges, if we are serious about keeping the lights on for future generations then companies need to be given the freedom and opportunity to innovate and invest for our long-term needs.”
Meanwhile, a windfall tax has been attacked as “economically illiterate” by an eminent economist who says it is the worst possible option for tackling fuel poverty.
Dieter Helm, a professor at Oxford University, said the prospect of a windfall tax undermines “a host of investment decisions” and would inflict further damage on Britain’s reputation for stability.
Copyright The Financial Times Limited 2008