UK’s power tax plan may avoid tilting at windmills

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Britain's Chancellor of the Exchequer Rishi Sunak arrives to speak at the Confederation of British Industry's (CBI) annual dinner in London, Britain, May 18, 2022. Peter Nicholls/REUTERS/File Photo - RC2U9U9T42GX

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LONDON, May 24 (Reuters Breakingviews) - In “Don Quixote”, the eponymous hero charges at imaginary enemies that are actually windmills. Rishi Sunak’s attempted raid on the UK electricity sector’s apparent 10 billion pounds of excess profit appears similarly misguided. Yet Britain’s finance minister probably won’t end up with entirely empty pockets.

European politicians are desperate to show that they are doing something for citizens wrestling with spiralling energy bills. But windfall taxes are tricky. While soaring gas prices may have pushed power from 50 euros per megawatt hour in late 2020 to 200 euros per MWh a year later, many big utilities had already sold forward their electricity at lower prices. This belated realisation forced Spain’s government into a humiliating U-turn on its windfall plans last autumn.

The 8% drop in SSE’s (SSE.L) share price on Tuesday reflects investor fear that Sunak will confront the same problem, but hit British utilities anyway. That would be a mistake. The 18 billion pound SSE is one of several companies investing heavily in renewable energy capacity to help cut domestic carbon dioxide emissions by 78% by 2035. It would also be unfair. Renewables players enjoy subsidies, but many contracts fix the price they can charge, so any upside goes to the government. Between October 2021 and April 2023, that will hand the UK exchequer 660 million pounds, according to the Energy and Climate Intelligence Unit.

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Yet Sunak may still have some joy. Drax (DRX.L), the 3 billion pound legacy coal plant operator that now largely burns biomass to generate electricity, saw its shares slump over 15% on Tuesday. That’s probably because it benefits from so-called “renewable obligation certificates”, a different type of state assistance that allows it to keep any upside from high power prices. The 40% hike in its shares in the last six months before today reflects that its EBITDA this year is, on Refinitiv estimates, likely to rise by 50%.

How much Sunak raises is hard to compute. The tax take will hinge on how much individual companies have sold forward, and the type of subsidies they receive. Either way, he might be better served restricting his sights to North Sea oil. Bank of America research suggests he could raise 2 billion pounds by hiking the tax burden from 40% to 50% at a cost of just 2% of incumbents’ 2022 free cash flow. Still, the amount he can get from the electricity sector is unlikely to be zero.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

- The UK government is drawing up plans for a possible windfall tax on more than 10 billion pounds of “excess profits” by electricity generators, including wind farm operators, the Financial Times reported on May 24.

- The levy, which would come on top of a levy on North Sea oil and gas producers, would affect power generators like SSE, ScottishPower, EDF Energy and RWE. An announcement could come this week or after the Jubilee bank holiday in early June, the paper said.

- Shares in Drax were down 18% at 6.63 pounds by 0924 GMT on May 24. SSE and Centrica were down 9% and 7% respectively.

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Editing by Ed Cropley, Streisand Neto and Oliver Taslic

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