North Sea Oil and Gas Producers: Investment Allowances

Tuesday 7th June 2022 Lords Chamber

Commons Urgent Question

The following Answer to an Urgent Question was given in the House of Commons on Monday 6 June.

“Less than a fortnight ago, my right honourable friend the Chancellor set out a series of measures to help British people at what we know is a difficult time. The oil and gas sector is making extraordinary profits, not as a result of recent changes to risk taking, innovation or efficiency, but as the result of surging global commodity prices, driven in part by Russia’s war. The Chancellor reassured the House that the Government

‘will make sure that the most vulnerable and the least well off get the support they need, and we will also turn this moment of difficulty into a springboard for economic renewal and growth.’

He also made the point that it

‘is possible to both tax extraordinary profits fairly and incentivise investment’.—[Official Report, Commons, 26/5/22; cols. 449-50.]

That is why we have introduced the energy profits levy—a new 25% surcharge on the extraordinary profits that the oil and gas sector is making. At the same time, the new 80% investment allowance will mean that businesses will get a 91p tax saving for every pound that they invest, providing them with an additional, immediate incentive to invest. That nearly doubles the tax relief available, and means that the more investment a firm makes, the less tax it will pay.

The levy took effect from 26 May this year, and will be legislated for via a Bill to be introduced shortly. It will be phased out when oil and gas prices return to historically more normal levels, with a sunset clause written into the legislation. The levy will raise about £5 billion in revenue over the next year, so that we can help families with the cost of living in the shape of significant, targeted support to millions of the most vulnerable.”

15:22

[Lord Tunnicliffe (Lab)]

I would like to follow up on the questions posed by the shadow Chancellor in the House of Commons yesterday but not answered, particularly now that the Government have had time better to digest them. First, how much will these tax breaks cost? When will the Government make their analysis public? How can the Government be sure about how much this new levy will raise when the Chancellor has added what is, in essence, a get-out clause? Why are the Government continuing to incentivise fossil fuels rather than renewables, which do not benefit from the tax breaks in this announcement?

[Baroness Penn (Con)]

My Lords, the energy profits levy is expected to raise around £5 billion in the first 12 months, and that factors in the investment allowance designed into it. The Government will publish a tax information and impact note alongside legislation to introduce the levy, which will come before Parliament shortly, and the OBR will take account of the levy, including the allowance, at its next forecast.

On the noble Lord’s point about renewables, no, they will not benefit from the investment allowance, because they are not subject to the additional levy, but I reassure noble Lords that we are absolutely committed to increasing investment in renewables. We have R&D tax credits, the super-deduction and a number of other schemes in place to support them.

[Lord Teverson (LD)]

My Lords, at Glasgow COP 26, it was agreed that there should be a continued deceleration and decrease in public subsidy of fossil fuels. In February this year, our own Climate Change Committee wrote to the Government saying:

“An end to UK exploration would send a clear signal to investors … that the UK is committed to the 1.5°C … temperature goal.”


How does the Minister reconcile this announcement about investment incentives, which will not in any way improve energy supply in the medium term, with COP 26—of which we are still the president?

[Baroness Penn (Con)]

My Lords, the Government’s position on not having fossil fuel subsidies remains the same, and we use the IEA’s definition of subsidies in assessing that. Of course, the investment allowance is part of the energy profits levy, an additional levy on oil and gas producers which are experiencing extraordinary profits at this time. In terms of investment in North Sea oil, we have set out in our energy security strategy that the North Sea will still be a foundation of our energy security. It is right that we continue to encourage investment in oil and gas; this is consistent with our transition to net zero. The noble Lord will know that we have gone the furthest and fastest so far in the G7 on decarbonising our economy; I am sure that this is a record on which we will continue to build.

[Lord Deben (Con)]

I declare my interest as chair of the Climate Change Committee. Will my noble friend the Minister accept that there is considerable misunderstanding about this matter and that the Government must be very clear about it? Will she also accept that this will not lower the price of gas? The only way to lower the price of energy is to have more of the cheapest form of generation, which is offshore wind, onshore wind and photovoltaics. Will she also accept that we ought to have a ring main so that we can bring the offshore wind onshore, and not put vast quantities of pylons across some of the most beautiful countryside in Britain?

[Baroness Penn (Con)]

I absolutely agree with my noble friend that this measure will not lower the price of gas. In fact, it is by that measure that it is not a subsidy to fossil fuels, but it will provide us with part of the funding to ensure that households across Britain which cannot cope with the extraordinary increase in energy costs at the moment get more support. I also agree with my noble friend that our investment in renewables so far has allowed us to have some cheaper forms of electricity—something we need to continue to build on.

[Baroness McIntosh of Pickering (Con)]

My Lords, has my noble friend the Minister calculated what the income raised by the Treasury has been from excise rates and VAT from North Sea oil and gas produce in the last 12 months?

[Baroness Penn (Con)]

I do not have that number with me for my noble friend, but I might be able to write to her on it. In terms of VAT receipts, there has not been a VAT windfall this year because every extra pound spent on energy at 5% VAT is not a pound spent on other things where VAT is at 20%. So the net effect of increased energy prices in terms of the Exchequer take for VAT is actually negative.

[Viscount Stansgate (Lab)]

My Lords, the Statement says that the levy

“will be phased out when oil and gas prices return to historically more normal levels”.

Can the Minister tell the House what a “historically … normal” level is?

[Baroness Penn (Con)]

My Lords, that is something which we will judge as we get to it, but I reassure the noble Viscount that there will be a sunset clause in the legislation to ensure that that judgment cannot go on indefinitely.

[The Lord Bishop of St Albans]

My Lords, will the Government, first, reveal the calculations they have made on why we are giving these subsidies, rather than putting the money into renewables? This has come at a time when we have seen massive increases in gas imports. Indeed, if we had done this some years ago, and been able to move and shift much more quickly, we would not be in half the mess we are in now. What is the basis on which the Government are deciding to subsidise the oil, rather than putting this extra financial incentive into renewables?

[Baroness Penn (Con)]

As I have explained to the House, this is not a subsidy, but an investment allowance which is part of an additional levy on oil and gas producers. Therefore, they receive the investment relief attached to it. As I have said to the House—and I am really happy to say it again—we are absolutely committed to increasing renewable energy in this country. We agree that it is cheap and clean, and an essential part of our path towards net zero.

[Lord Grocott (Lab)]

My Lords, the Minister has been talking about an energy profits levy, which she says will raise about £5 billion a year. We have been talking, as she knows, about a windfall tax, so can she explain to the House the difference between a levy and a tax?

[Baroness Penn (Con)]

One of the crucial differences is the investment allowance we have just been discussing, to ensure that the levy we have in place does not disincentivise investment in the North Sea, which will be really important to longer-term energy security if we face similar situations in future. Another difference is that this levy will raise about £5 billion, allowing us to give around £1,200 to the most vulnerable households, unlike the plans from the party opposite, which would have raised around £2 billion to £3 billion, giving £600 to the most vulnerable households.

[Lord Bellingham (Con)]

My Lords, the Minister gave a very good reply to the question asked by my noble friend Lord Deben, but she did not address the point about the need for an offshore transmission network. Without that, there are going to be more pylons going through various parts of the country, which will do huge damage to the environment.

[Baroness Penn (Con)]

My noble friend is absolutely right. That went slightly beyond the energy profits levy investment allowance, but I would be happy to write to him with more details.

[Lord Rooker (Lab)]

The Minister has twice referred to the fact that onshore and offshore wind power is the cheapest possible form of energy. That can be the case only if we ignore intermittency. We have intermittency with offshore. If we do not cost that in, we will be in real trouble comparing energy sources in the future.

[Baroness Penn (Con)]

The Government absolutely recognise the importance of consistent baseload power as well; that is why we are committed, for example, to more investment in nuclear.

[Baroness Bennett of Manor Castle (GP)]

The OECD last year calculated that UK support for fossil fuels, through tax breaks and subsidies for exploration and research and development, totalled £10 billion. Can the Minister tell me what the new figure will be with the 80% investment allowance? Moreover, last January the noble Lord, Lord Grimstone of Boscobel, told me that the Government were seeking to ensure that free trade agreements included an end to fossil fuel subsidies. How is that going?

[Baroness Penn (Con)]

I believe that it is going very well. As I have explained to the House, according to the IEA’s definition of fossil fuel subsidy, the UK is subsidy-free and will continue to be so. We are happy to offer investment allowances to companies investing in the North Sea: it is a key part of our energy security strategy and consistent with our path to net zero. I reassure the noble Baroness, that those investment allowances can be used to support the decarbonisation of upstream activities, which could include electrification, making it a cleaner form of energy.