The shares of power generating firms in the UK fell steeply on Tuesday after Britain announced plans for the imposition of a possible windfall tax on more than GBP10 billion (USD$12.6 billion) of excess profits made by companies. This action comes at a time when the government is being stressed to do more to assist households offset the soaring cost of living because of higher inflation rate, with the UK regulator warning that national energy bills are set to rise more than 40% in 2022. Spain and Italy have already announced a windfall tax on energy companies.
A windfall tax is a one-off tax imposed by a government on a company or a group of companies that benefited from something they were not responsible for. Companies operating in the Utility industry are earning considerably more than what they were earning in the previous year. This is mainly because of the substantial increase in energy prices due to supply chain disruptions caused by the pandemic and the Russia-Ukraine conflict.
A sharp increase in energy prices in the recent times will have a disproportionate impact on lower income households. Owing to the increase in energy prices and inflation, lower income households must spend a larger share of their income on utilities than do higher income groups. The government already considered imposing a tax on the profits of North Sea producers, including BP and Shell, which reported windfall profits due to high oil and gas prices last year. But, officials have also been urged to consider extending the tax to other companies in the energy supply chain, keeping in mind the soaring energy bills. Energy suppliers have warned that 30-40% of households could find themselves in fuel poverty in the upcoming winter.
Top 3 Companies affected:
The shares of Drax, owner of the UK’s biggest power station, fell 16%, Centrica’s shares fell 10% and SSE’s shares fell nearly 9% in London on Tuesday. Britain’s Chancellor Rishi Sunak ordered officials to broaden the scope of any windfall tax.
Outlook:
The conflict in Ukraine, combined with a rapid recovery in demand for fuel to pre-pandemic level, resulted in a huge increase in oil and gas prices in recent months. Due to the increase in prices, oil and gas companies continue to make a significant profit. With the utility companies not increasing their reinvestment of such profit in socio-economic growth, the government would likely impose windfall taxes to offset the soaring utility prices. According to the British government, an announcement in this regard is likely to come this week or in early June.
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