Jeremy Hunt hopes to raise £14bn next year after increasing the windfall tax on oil and gas companies and reining in the profits of electricity generators.
The chancellor also confirmed that the existing windfall tax on North Sea oil and gas operators, the energy profits levy, will be raised from 25% to 35% and extended by two years, until March 2028.
He said the tax would be extended from 1 January to apply to “low carbon electricity generators”, which includes wind, solar and nuclear generators, and be levied at 45%; a 40% rate had been expected.
Hunt said he expected the two taxes to raise £14bn next year.
Shares in the power station owners Centrica, Drax and SSE fell sharply moments after Hunt’s announcement. Oil and gas stocks were broadly unmoved.
The chancellor said that most countries are still paying for the consequences of the pandemic and that this has been worsened “by a made-in-Russia energy crisis”. He said energy prices have risen to eight times their historic average.
He had “no objection to windfall taxes if they are genuinely about windfall profits caused by expected conditions in energy prices. Any such tax should be temporary, not deter investment and recognise the cyclical nature of energy businesses.”
It is understood that Treasury officials will meet energy bosses on Friday to discuss the proposals.
The surge in gas prices, in part fuelled by Russia’s invasion of Ukraine, has handed a surprise lift in profits to oil and gas companies, and generators including nuclear power stations and windfarms on older contracts.
Officials have spent more than six months examining methods of taxing electricity generators, some of which have enjoyed big profits on the back of soaring power prices – which are linked to the rising wholesale cost of natural gas, even for renewable power such as wind and solar – while their costs remained largely stable. Companies have argued that a tax on generators could deter investment in green energy and would be difficult to design in a fair manner because many companies had sold most of their power ahead, reducing their windfall.
However, the energy profits levy has been criticised as it does not extend to the excess cash generated by oil and gas giants’ trading, refining and forecourts divisions. Hunt did not alter the levy to reach these windfalls.
Alice Harrison, fossil fuels campaign leader at Global Witness, said: “The British public has every right to be angry when just a few weeks ago BP and Shell announced combined profits of £15bn in only the third quarter of this year.
“This so-called windfall tax and budget doesn’t go anywhere near what’s needed to protect UK citizens that are being dragged into poverty, and barely touches the sides of the immense profits that energy companies have been amassing.”
Hunt confirmed during his speech that the energy crisis had added £150bn to bills this year. The move to restrict profits on electricity generators represents a departure from the former prime minister Liz Truss’s plan to cap the revenues of renewable and nuclear power producers from next year, in line with the EU’s “revenue cap”. The government has worked on plans to shift companies on a voluntary basis to contracts for difference, which cap their revenues but guarantee them a long-term income. However, industry sources said negotiations had stalled in recent weeks and the plan would not be implemented imminently.