The UK’s windfall tax risks taking the wind out of renewables investment

To be precise, it’s more the tax relief that accompanies the government’s ‘energy profits levy’ that encourages more oil and gas production rather than clean energy investment.

At first glance, a 25 percent surcharge on UK oil and gas producers’ extraordinary profits UK Chancellor Rishi Sunak announced last week, doesn’t seem to impact the country’s renewables sector nor those investing in it.

Though any significant change in policy or taxation has the potential to make investors nervous, it’s not the primary concern when it comes to renewable energy investors.

However, the 80 percent “investment allowance” – a measure that would effectively result in 91p in tax savings for every £1 ($1.25; €1.17) re-invested in oil and gas production – that is part of the government’s energy profits levy is a step backwards for renewables and energy transition more broadly.

“I would say that is a regressive step towards net zero,” Will Sheard, head of analysis and global due diligence at K2 Management, told Infrastructure Investor, noting that North Sea oil and gas production had been winding down over the past decade.

“Obviously you need to keep the lights on, but at the same time I feel there could be bolder decisions towards decarbonisation,” he continued. “Rather than incentivising the oil and gas companies to reinvest in North Sea oil and gas production, could we not have used that money to invest in grid infrastructure upgrades or energy efficiency for example?”

That’s a valid question, especially in light of a recent Financial Times report according to which National Grid is telling renewable energy developers that they’ll need to wait anywhere between six and 10 years to connect to the grid due to network constraints.

At the same time, the UK, under its Energy Security Strategy announced in April, wants 95 percent of electricity to be produced from low-carbon sources by 2030, with offshore wind and nuclear power playing a central role in achieving that goal.

Yet, the offshore wind development process is still too lengthy, according to Sheard. And if the government wants the offshore wind sector to be a core component of its energy strategy, rather than offer tax relief to the oil and gas majors operating in the North Sea, which have also branched out into renewables, to re-invest in oil and gas, the government should be investing in the supply chain.

“Investment in the supply chain, which we know is constrained for offshore wind projects – turbine manufacturers, foundations, cables, etc, are all overstretched,” Sheard said.

“There’s no lack of money. People really want to invest in these offshore wind projects,” he continued. “The problem is that there aren’t enough projects.”

The government’s tax relief measure, or what it calls ‘super-deduction’ style relief, is certainly no help in solving that problem.