Windfall taxes are a mark of energy policy failures

Windfall taxes are a mark of energy policy failures

Faced with sharply rising household energy bills, there is great political consensus that this is a good time to bash the companies with a windfall tax. Prices have gone up, companies are benefiting from the troubles in Ukraine, and governments are in the business of redistribution. There are two questions: first, what exactly is a windfall; and second, why have windfalls emerged? Windfalls arise all the time in competitive markets; they happen when prices, but not costs, go up. The converse happens too: prices fall, whilst costs go up. It's swings and roundabouts, and investors take their chances. In the North Sea, prices can only be excessive if the offshore taxation regime is flawed – and the answer is to put that tax regime right. Onshore in the electricity market, prices are excessive if the wholesale market does not reflect the costs. It doesn’t: the wholesale price of electricity is roughly equal to the spot price of gas, whereas the costs of more than half the electricity generated have nothing to do with the gas price. The lessons from this sorry episode are: fix North Sea taxation, and reform the electricity market to meet the challenges and cost structures of the net zero targets and security of supply.

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