Labour’s flawed funding plan for Great British Energy

So Keir Starmer is challenging his inner Tony Blair. And so he should. The days of the Labour party worrying about the legacy of a man who won three elections in a row are over; the days of them working out how to stay in power for a decade or more have just begun. The pledge card is a welcome return to coherent Blairite messages: you can be in no doubt what Starmer wants to do and how he is going to pay for it. Well, up to point, Lord Copper.

Labour’s energy plans aren’t completely awful and their focus within the policy on energy transmission and the national grid is very welcome but their stand-out, read it on the card, pledge to set up Great British Energy (GBE) is, as this column has pointed out before, a truly terrible idea. We don’t need to revisit the policy: it’s Bennite nonsense and won’t work. That’s not to say that there isn’t room for major state intervention in our national power system – there is – it’s just that it is better, quicker and more efficiently done through incentivising investment and state subsidies. But we can also learn quite a lot about Starmer’s Labour and the readiness for power when they talk about how they’re going to fund GBE and it’s not looking good.

Labour says that the setting-up of GBE will be funded by a windfall tax on North Sea oil and gas. This may surprise quite a lot of people as North Sea oil and gas producers are already subject to a windfall tax called the Energy Profits Levy. The Levy was imposed in the dying days of the Johnson administration in May 2022 by one Rishi Sunak when the Tories shot Labour’s fox by nicking this policy wholesale. The whole point of someone shooting your fox is that you need a new fox. This reality, however, appears to have passed Labour by.

Instead, they now talk about funding GBE through an increase in the Energy Profits Levy, something Labour describes as a “proper” windfall tax, which will increase taxes on profits in the North Sea by 3 per cent; from 75 per cent to 78 per cent. In announcing this, they haven’t realised that investment and production in the North Sea has already taken a hit from the Levy and that oil and gas prices, and particularly gas prices, have fallen since (but not because) the tax was announced. As an example, in the first quarter of this year, Shell’s realised gas price from its global operations was down 25 per cent on the previous quarter reflecting what has happened to European gas markets over the past 6 months. So whatever money they were banking on from their 3 per cent rise in the Levy has disappeared.

At the same time, they seem to have no understanding of what is actually happening in the North Sea. Lukanyo Mnyanda of the Financial Times published a long article earlier this month that explained the damage the Levy had done and made the crucial point that, as a declining hydrocarbon basin, oil and gas in the UK North Sea is now produced by a patchwork of smaller companies whose ability to swallow major tax changes is very limited. The FT quoted Chris Lewis of oil minnow Hartshead Resources, who said his company has delayed awarding contracts due to uncertainty about the tax regime: “That has a direct impact on jobs, on supply chain companies in the UK, and on receipts to the exchequer because if you delay our gas production, you delay us paying tax on it.” So, again, the increased Levy is going to pay for what?

The Levy looks even less clever when you discover that production from the North Sea is now 1.2 million barrels a day of oil equivalent (this number includes gas as well as oil), the lowest production since 1977, and is trending lower which also means less tax receipts. Offshore Energies UK (OEUK), the trade association for the UK’s 400 offshore industries and organizations, has more bad news. They estimate that the Levy has driven 90 per cent offshore energy firms to reduce spending in the North Sea, most notably Harbour Energy and Apache, and that a continued lack of investment will lead to production cuts of 80 per cent by 2030. 

So far, so moronic but this desire to tax the North Sea oil and gas industry for want of any better ideas speaks to a wider inconsistency that both parties seem incapable of recognising. Both parties have said that hydrocarbons, including oil and gas from the North Sea, will continue to play a large part in the UK’s energy mix for the foreseeable future; both parties want to make sure the UK is not at the mercy of foreign despots when it comes to hydrocarbon supply; both parties seem intent on taxing the North Sea oil and gas industry out of existence. They’re not the first UK politicians to do this – the industry has been buggered about by Healey, Lawson, Clarke, Brown, Osborne et al for years – but this time it feels different: that the golden (Brent) goose is finally being killed off; we – and Great British Energy –  will miss it when it’s gone. 

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