Energy (Oil and Gas) Profits Levy Bill

Baroness Penn Excerpts

2nd reading & 3rd reading
Wednesday 13th July 2022 Lords Chamber

Moved by

[Baroness Penn]

That the Bill be now read a second time.

[Baroness Penn (Con)]

My Lords, we will take a little more time over this Bill. We are here to debate the Energy (Oil and Gas) Profits Levy Bill, introduced in the House of Commons. It may be helpful to start with a little of the context behind the Bill.

People across this country are facing rising energy costs and an increase in their overall cost of living. Of the basket of goods and services we use to measure inflation, a record proportion are seeing above-average price increases. Indeed, this country is now experiencing the highest rate of inflation we have seen for 40 years, and this is causing acute distress to the people of this country.

In May the Government announced a series of measures to help the British people during this difficult time—a period in which we have seen prices in oil and gas reach new heights. Oil prices have nearly doubled since early last year and gas prices have more than doubled. This is a global phenomenon, driven by factors out of any single Government’s control and in part by Russia’s war.

With increased prices at this global level, profits from oil and gas extraction in the UK have also shot up. These are unexpected, extraordinary profits, above and beyond what forecasters could have expected the sector to earn. Because of these extraordinary profits and to help fund more cost of living support for UK families, the Government are introducing the energy profits levy. This temporary levy is a new 25% surcharge on these extraordinary profits. When oil and gas prices return to historically more normal levels, it will be phased out. However, we have a responsibility to help those who, through no fault of their own, are paying the highest price for the inflation we face.

I now turn to the content of the Bill. As set out in the energy security strategy, the North Sea will still be a foundation of our energy security. Indeed, currently around half of our demand for gas is met through domestic supplies. In meeting net zero by 2050, we may still use a quarter of the gas that we use now. It is therefore necessary to encourage investment in oil and gas, encouraging companies to reinvest their profits to support the economy, jobs, and the UK’s energy security.

It is possible to both tax extraordinary profits fairly, and to incentivise investment. That is why, within the energy profits levy, a new super-deduction style relief is being introduced to encourage firms to invest in oil and gas extraction in the UK. The Government expect the energy profits levy, with its investment allowance, to lead to an overall increase in investment. The new 80% investment allowance means that businesses will get a 91p tax saving overall for every £1 they invest, providing them with an additional immediate incentive to invest. This nearly doubles the tax relief available and means that the more investment a firm makes, the less tax it will pay. It means that the allowance can be claimed when the spending on the investment is actually incurred. This is unlike the allowance under the existing permanent tax regime for oil and gas companies, which can be claimed only once income is received from the field subject to the investment. As noble Lords may know, this can take several years.

I will provide some clarity on what the investment allowance will apply to. First, if capital or operating expenditure qualifies for the supplementary charge allowance, it will qualify for the energy profits levy allowance. Since the levy is targeted at the extraordinary profits from oil and gas upstream activities—that is, the profits that came about due to the global price increases—it makes sense that any relief for investment must also be related to oil and gas upstream activities. Secondly, such spending can be used to decarbonise oil and gas production, through electrification, for example. Therefore, any capital expenditure on electrification, as long as it relates to specific oil-related activities within the ring-fence, will qualify for the allowance. Examples of electrification expenditure on plants and machinery are generators, which include wind turbines, transformers and wiring.

I remind noble Lords that there are other tax and non-tax levers to support non-oil and gas investments, such as in renewables. These levers include the super-deduction and the UK’s competitive R&D tax credit regime. Importantly, returns on these investments are taxed at 19%, rather than 65%, as for UK oil and gas profits.

The Government have been listening closely to industry feedback. Late last month, the former Chancellor met industry stakeholders in Aberdeen to discuss the levy and make sure it works as the Government intend. Since then, the Government made a change to the legislation, which is reflected in the Bill. Tax repayments that oil and gas companies receive from the petroleum revenue tax related to losses generated by decommissioning expenditure will not be taxed under the levy. These repayments are typically taxed under the permanent tax regime, but, since wider decommissioning expenditure is also left out of account for the levy, this change is consistent and fair. I reassure noble Lords that, with this change, the Government still expect the levy to raise around £5 billion over the next year.

Finally, I turn to how long the levy will be in place. It will take effect from 26 May this year, and it will be phased out when oil and gas prices return to historically more normal levels. The sunset clause in the Bill ensures that the levy is not here to stay. Very few taxes have expiry dates set in law, so this provision demonstrates the Government’s commitment to keeping the levy temporary, and it gives oil and gas companies further reassurance, as they seek to plan their investments.

The Bill, and the levy it legislates for, should be seen against the backdrop of the reality that we find ourselves in: people are in hardship across the country, while businesses in the UK oil and gas sector have made profits surpassing their expectations, reflecting the extraordinary global context. Through the Bill, the levy will raise around £5 billion of revenue over the next year. This is not about maximising revenue for the Exchequer but about targeted objectives: to help with significant targeted support for millions of the most vulnerable, and to encourage the oil and gas sector to reinvest its profits to support the economy, jobs and the UK’s energy security. For these reasons, I commend the Bill to the House.

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[Baroness Penn (Con)]

I thank all noble Lords for their contributions to this debate. In closing, I will focus on responding as far as possible to the many and varied points raised.

As I said at the beginning, the global context of high oil and gas prices has driven extraordinary profits for UK oil and gas producers. It is both fiscally prudent and morally right therefore that, through the Bill, we introduce a temporary and targeted levy on these extraordinary profits, which will help fund more cost of living support. At the same time, companies must have ample incentives to continue to invest and the Bill has been tailor-made to account for this. The new 80% investment allowance will provide them with an additional, immediate incentive to invest. This means that, overall, businesses will get a 91p tax saving for every £1 invested.

Turning to the points raised in today’s debate, the noble Lord, Lord Tunnicliffe, asked about revenue that could have been raised had the levy been in place between January and May this year, and the noble Baronesses, Lady Kramer and Lady Bennett, made similar points. It is not standard for the Government to publish assessments of the fiscal and economic impacts of measures that are not being introduced and it is not clear that doing so in this case would be a beneficial use of public resources. I would also add that since the beginning of the year, three significant things have changed. The situation in Ukraine altered considerably, inflation is considerably higher than previously expected and the Government had concrete information on the indicative levels of the autumn and winter energy price cap, allowing us to design the levy and the related cost of living support to meet the scale of the challenge we faced.

As for whether an earlier commencement date for the levy was an option, as noble Lords would no doubt expect, the Government carefully considered several options. Indeed, following thought and with time to consider, the levy has a more appropriate tax base. The result is that it is not depressed by historical losses and has an investment incentive that is not only more generous but more effectively targeted at new investment. The Government are also very careful when it comes to the retrospective application of taxes. Although this tax will apply from 26 May—the date it was announced—there needs to be careful consideration whenever the question of retrospection is raised, particularly in relation to tax.

The noble Lord, Lord Tunnicliffe, also asked about the Government’s plan to phase out the energy profits levy if oil and gas prices return in future years to historically more normal levels. As the former Chancellor told the Treasury Select Committee, the Government are discussing that with industry. The former Chancellor also mentioned the Brent crude price over the last five or 10 years, which is along the lines of $60 or $70 a barrel. Similarly, companies have communicated to their shareholders what they would consider normal oil prices; they tend to use numbers in the range of $60 or $70, so that gives a sense. The situation is complicated because prices have changed at different rates, with gas, for example, reaching a peak in March. However, as the noble Lord mentioned and other noble Lords noted, there is a sunset clause of just over three years in the legislation as a backstop. If prices come back to the range that the former Chancellor discussed, one might expect the levy to fall away sooner.

The noble Lord, Lord Tunnicliffe, also mentioned that fossil fuel investment will be subsidised in the tax system at a rate of 20 times the incentives available to renewable energy schemes. Other noble Lords expressed concern around the investment incentives in the Bill and whether these challenge our commitment to net zero. Having an element of independence of oil and gas in our energy system is important, and sourcing gas locally, through the North Sea, makes us less dependent on imports. As set out in the Government’s energy security strategy, the North Sea will still be a foundation of our energy security, so it is right that we continue to encourage investment in oil and gas. Our oil and gas have lower emissions intensity compared to imported liquid natural gas.

As I noted in my opening speech, in meeting our net-zero target by 2050 we might still use a quarter of the gas that we use now, so to reduce our reliance on imported fossil fuels we must fully utilise our great North Sea reserve. However, that does not in any way contradict our commitment to our net-zero targets. I take issue with the noble Baroness, Lady Bennett, claiming that this Government are in any way climate change denying. The UK has decarbonised its economy further and faster than any other G7—

[Baroness Bennett of Manor Castle (GP)]

Just to clarify, I was referring to the Scott Morrison Government of Australia when I said “climate change denying”.

[Baroness Penn (Con)]

I believe she was comparing that Government to this one. This Government have legislated for our net-zero targets—the first major country to do so. We have decarbonised further and faster than our G7 counterparts, and we have shown global leadership on climate change and wider nature and biodiversity through our chair of the G7 and COP 26. I know that noble Lords will continue to push the Government to do better, go further and do more. That is absolutely right and appropriate. The noble Baroness believes in effective campaigning; I am not sure that an effective way to campaign is not to recognise some of the progress made on the journey.

The noble Lord, Lord Tunnicliffe, said that investment will be subsidised in the tax system at a rate of 20 times the incentives available to renewable energy schemes. We do not recognise these figures. Oil and gas companies within the ring-fence regime are already paying tax on their profits at more than three times the rate of other companies, so any tax relief is reducing a higher tax bill. Although oil and gas companies save an additional 45p in tax for every £1 they invest—91p in total from the levy—they will pay tax at 65% of remaining profits. In contrast, outside the oil and gas ring-fence regime, profits on companies such as those in the renewables sector are taxed at 19%. So if a company made £100 in profit it would pay £65 in tax in the oil and gas regime but only £19 if it were outside the regime. If it then reinvested £25 of that profit, an oil and gas company would still pay more than twice the tax of a normal company—just over £42 compared with just under £13 for a company outside the regime.

The noble Lords, Lord Sikka and Lord Teverson, expressed concern that a large proportion of the estimated £5 billion of revenue raised in the first 12 months of the levy being in place would be lost to the investment allowance. I reassure noble Lords that the £5 billion estimate is net of the effect of the investment allowance.

[Lord Sikka (Lab)]

Will the noble Baroness tell us the cost of giving this 80% investment allowance? She said that the £5 billion is net; what would it have been without that, so that we know what the cost is?

[Baroness Penn (Con)]

I will come on to that in just a minute. Relatedly, I was just about to answer the question about whether the money going into the tax relief might be dead weight, in that the investment would have happened anyway. The Government expect the combination of the levy and the investment allowance to lead to an overall increase in investment.

In relation to the noble Lord’s question, the OBR will take account of this policy in its next forecast. I think we will see some more detail from its assessment then. I hope that the net additional investment that we expect from the design of the levy provides some reassurance to my noble friend Lord Moynihan.

The legislation also includes an anti-avoidance provision to prevent any recycling of existing assets getting the allowance. I think that is about the targeting of the allowance and avoiding dead-weight costs, rather than not being supportive of the general concept of recycling assets.

[Lord Sikka (Lab)]

I appreciate the point the noble Baroness made about recycling, but there is nothing whatever in the Bill to prevent an oil and gas company leasing a used asset, saying that it is a new investment and claiming this allowance. That asset need not even be owned by a company in the UK—the lessor could be somewhere else in an offshore tax haven. It could be an affiliate of the same company that pays, acquires a right and then uses it. The Bill does not prevent that, does it?

[Baroness Penn (Con)]

My Lords, the investment allowance has been carefully designed to ensure that it incentivises investment but does not provide relief for investment that would have taken place otherwise.

I will pick up on a couple of further points from the noble Lord, Lord Teverson, who had a few questions. To clarify, the allowance does apply to new as well as existing fields. It will not apply to carbon capture, usage and storage, as it applies only to upstream activities, and carbon capture, usage and storage is not an upstream activity. However, it would apply to the decarbonisation of those upstream activities. I hope that makes sense.

On energy storage, the Government published an energy security strategy in April to increase domestic energy production and accelerate the move away from gas towards low-carbon energies such as nuclear, renewables and hydrogen. It builds on delivery over the past decade, including giving the go-ahead to the first nuclear power plant in a generation and a fivefold increase in renewables. The Government will ensure a more flexible, efficient system for both generators and users by encouraging all forms of flexibility, with sufficient large-scale, long-duration electricity storage, to balance the overall system by developing an appropriate policy to enable investment by 2024.

The noble Lord, Lord Tunnicliffe, asked about the £400 energy discount and whether that may apply to second homes. The Government’s intention is for the Energy Bills Support Scheme to reach as many households as possible from October, while minimising the administrative complexity of the scheme. We consulted on the basis of delivering the £400 via domestic electricity meter points. While he is right that some households have second homes or multiple meter points, it will be important to balance this against the timely and efficient delivery of the scheme. I know noble Lords have expressed concern about the targeting of the support that the Government will provide. I just say that, in contrast to calls from other Benches—for example, around a different route, which could be to reduce VAT—the flat-rate payment provides a better targeted level of support to those households that are most vulnerable. I think that is something that we should support.

The noble Baroness, Lady Kramer, asked for reassurance that the proceeds of the levy will go towards support with the rising costs of living. As her noble friend said, the support announced this year is worth £37 billion. Our estimate for the first year of the levy is around £5 billion. While there is not a direct ring-fence, it was announced at the same time as the additional measures in May, which were about £12 billion of that £37 billion. The extra support that the Government are giving people actually outweighs the revenue being raised from this levy. The distributional analysis published alongside the May package shows that it was highly progressive, and around three-quarters of total support will go to vulnerable households. As noble Lords will also know, we made it clear at that point that next April’s uprating of benefits will use the normal September CPI—as we expect that level of inflation to be higher than it will be the following April—to account for ongoing high energy costs for those households on the lowest incomes.

The noble Baroness, Lady Kramer, the noble Lords, Lord Tunnicliffe and Lord Teverson, and others asked about energy efficiency. I talked about the £37 billion of cost of living support, and I reassure noble Lords that the Government are spending £6.7 billion in this Parliament to improve energy efficiency and decarbonise heat in buildings. Over the next three years, the Government are investing a further £1.8 billion on low-income household energy efficiency, on top of the £1.2 billion spent since 2020. This will improve around 500,000 homes, saving households on average £270 a year on their energy bills long term, at current energy prices.

Some £471 million has been spent to date on the social housing decarbonisation fund and sustainable warmth programme, estimated to save households an average of £350 to £450 a year on their energy bills. We are also consulting on expanding the energy company obligation to £1 billion per year for improvements to fuel-poor households. The Government agree with noble Lords about the importance of improving energy efficiency, as well as providing immediate support to households with the cost of living.

I cannot answer the question from the noble Lord, Lord Teverson, on the coal mine in Cumbria, or all the questions from the noble Lord, Lord Sikka, but maybe I will write to them both and copy in all noble Lords so that they get satisfaction on those points.

[Lord Teverson (LD)]

I was slightly mischievous in asking the question, because clearly the Minister will not be able to write and give me the answer, although I would like her to. The Government have clearly put off this decision yet again, and I just think it would be a really good sign if they made up their mind and did the right thing. Perhaps they could make that decision, at least before we have regime change.

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[Baroness Penn (Con)]

My Lords, if the noble Lord is happy to consider that message received, maybe I will direct my letter just to the questions from the noble Lord, Lord Sikka, which I may be able to answer with more success.

I have a final point, which is quite crucial to why we are all here today, in answer to the noble Baroness, Lady Kramer, who asked whether we will implement the levy we are legislating for. I assure all noble Lords that we will. We expect Royal Assent to be quite swift after we finish with the Bill this evening, and the levy will come into effect not just from that point but retrospectively from 26 May.

The noble Baroness noted the separate issue of the electricity generation sector. The Government continue our work to explore whether certain parts of the energy generation sector are receiving extraordinary profits, partly due to record gas prices. We are consulting with that sector both to drive forward the energy market reforms and to evaluate the scale of any potential extraordinary profits, and we are considering the appropriate steps to take. That work is proceeding separately and more slowly, but this levy—once noble Lords have agreed to it this evening—will absolutely go ahead.

Bill read a second time. Committee negatived. Standing Order 44 having been dispensed with, the Bill was read a third time and passed.