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Even Shell can see it is earning too much from this
crisis – the energy market needs a profits cap
Shell’s third-quarter results announcement has reignited the debate on windfall
profits in the energy sector. The former prime minister Liz Truss’s “commitment”
to avoid any further windfall profits taxes looks set to be the latest victim of
a U-turn.
Additional taxation is justified, as Shell’s chief executive, Ben Van Beurden,
accepted a few weeks ago. The previous measures, introduced at the end of May,
were clearly too limited and have left Shell in the almost embarrassing position
of reporting quarterly profits of $9.5bn, just as the chancellor prepares the
autumn statement.
The challenge of reconstructing a broken energy market is, however, much wider,
and needs more than simply another tax change. The transition to a “lower carbon
energy mix” remains mostly rhetorical. Consumers are paying too much for the
energy they need, not just because of Putin’s war in Ukraine but also because
the energy regulator, Ofgem – an organisation established to protect the
consumer – has failed. A fair fiscal system should be just one part of an energy
policy transformed to deliver the key objectives of energy security,
affordability and reduced emissions.
The lack of investment over the last decade is one of the key reasons why prices
rose as the Covid pandemic receded and economic activity around the world picked
up. A lack of investment in a diverse mix of supplies is why prices rose still
further after the invasion of Ukraine in February. Security of supply in a
volatile global market also depends on having in place some protection against
sudden falls in supply. Across Europe, most major economies have in place
several weeks of stored gas supply. The UK, thanks to the ideological illusion
that supplies would always be available on the open market, has almost none.
If we have a cold winter, and if Putin continues to restrict the supplies of gas
flowing to Europe, that lack of storage could turn into rationing and blackouts.
Storage requires investment, as does the upkeep of the supply grid.
Unless the whole sector is to be brought into public ownership, something that
seems unlikely given the state of the public finances, most of the investment
needed will come from private companies such as Shell, along with other
producers and retailers. Those companies need to make a return sufficient to
allow them to keep investing. But there is no justification for that to be at
the windfall levels that we are seeing, given that energy, especially at the
retail level, is essentially a utility business, with large barriers to entry
and elements of effective monopoly.
In the circumstances we need not just a price cap but a profits cap – a limit on
the rate of return companies can make. When profits exceed that limit, any
surplus should go back to the consumer or the taxpayer.
A sensible fiscal regime should tax excess profits after a forensic audit of
each company to show the exact breakdown of their costs and revenues. If
companies not affected by what is happening in global gas markets misuse this
time of volatility to exploit their customers, they, too, should be audited.
There is no case for the producers of power from wind or nuclear to be altering
their prices at all. The price cap, which is based on the wholesale price of
gas, should not provide cover for everyone else to rake in unjustified profits.
Any new taxation needs to be explicitly designed to incentivise additional
investment in new low-carbon supplies and research into the next generation of
technologies, which could reduce emissions and take us towards towards the goal
of net zero. Again, a forensic test is necessary to ensure that the investment
is genuinely “additional”. The level of public trust in energy suppliers is low
and can only be restored by complete transparency.
The oversight and policing of such a system requires a reinvention of the
regulatory system. Ofgem has failed. A licensing scheme that encouraged
innumerable small companies to become retail suppliers, regardless of whether
they had the financial capacity to cope with volatile prices, has cost UK
consumers more than £3bn. Turning a blind eye to the absence of back-up storage
is a sign of timidity. A good regulator should be strong enough to challenge
governments if they are neglecting such risks. Deep knowledge of the energy
sector should be a requirement for those serving on the Ofgem board.
The events of the last year, including now the announcements of massive profits
at a time when even higher inflation and austerity looms, show we are a long way
from having a fair and effective energy policy. The UK cannot isolate itself
from the world market but we can have policies in place that mitigate the risks
and ensure that there is no scope for anyone to exploit instability at the
expense of society as a whole.
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https://www.theguardian.com/commentisfree/2022/oct/27/shell-energy-market-profits-cap-oil-consumers