Surging oil and gas profits mean the Government's windfall tax will rake in money equal to half the cost of this winter’s £60bn energy support package for households and businesses.
The “energy profits levy” announced by Rishi Sunak earlier this year was originally expected to raise around £5bn a year by taxing the earnings of North Sea operations, or a total of £20bn by 2025/26.
But official estimates show the levy – charged in addition to corporation tax – is now expected to bring in £28bn overall, as surging oil and gas prices fuel a bonanza for the industry.
That includes £7.7bn in 2022/23, then £10.4bn, £6.4bn and £3.5bn in the following years, although the Government said volatile markets made it hard to give firm predictions.
It means the levy’s total haul could amount to nearly half of the cost this winter of Liz Truss’s gargantuan support package to help households and businesses weather rising energy bills.
Her intervention will involve freezing annual household energy bills at an average of £2,500 for the next two years, starting October 1, and reducing businesses bills by roughly half for an initial six months.
The cost estimate for the package was on Friday revealed to be £60bn for six months from October, including £31bn for households and £29bn for businesses.
Kwasi Kwarteng, the Chancellor, confirmed the Government will borrow the money, adding that the “heavy price of inaction would have been far greater than the cost of these schemes”.
“In the context of a global energy crisis, it is entirely appropriate for the Government to use our borrowing powers to fund temporary measures in order to support families and businesses,” he said.
Mr Kwarteng added that the measures to hold down energy bills would reduce peak inflation by five percentage points, cutting the cost of servicing index-linked debt.
But Simon Virley, head of energy at KPMG and a former senior civil servant working on energy, said there was a “very wide margin of error” in the figures and that ministers were “effectively writing a blank cheque”.
He said: “The eventual cost will depend on what happens with global gas prices, how cold this winter is, and wider economic activity.
“It is clear a more targeted approach is going to be needed beyond this winter that focuses help and financial support on those that need it most.”
Ministers were forced to act to protect millions of households from financial hardship after surging wholesale gas prices were on track to push annual bills to more than £5,000 per year in the wake of Russia’s invasion of Ukraine.
While UK gas prices have cooled from August’s highs, they remain more than five times above long-term averages and could surge again if there is a particularly cold winter or if Russia goes further in cutting off supplies to the Continent.
However, those same price rises are also likely to be behind the Government’s bigger-than-expected take from the energy profits levy, said Graham Freedman, a gas analyst at Wood Mackenzie.
Experts predict that constrained supplies, caused by Russia’s throttling of flows and the EU’s desire to wean itself off Moscow exports in the longer term, will keep prices elevated for years to come.
Mr Freedman added: “Russian gas has historically always been the cheapest on the market, so if you are going to displace it with something else, that something else is likely to be more expensive.
“It also takes time to bring new gas supplies online and to build the necessary infrastructure.”
In the meantime, the energy profits levy has prompted warnings from North Sea oil and gas firms that it could end up deterring investment at a time when Liz Truss is trying to boost domestic oil and gas production - and national energy security.
Ryan Crighton, policy director at Aberdeen & Grampian Chamber of Commerce, said: “The North Sea has become an easy target for populist politicians keen for a quick headline.
“However, it is quite clear from these figures that the North Sea is picking up a large part of the tab for the measures announced by the Chancellor.
“People calling for any further windfall now risk taxing the sector into oblivion.”
Government green-lights controversial Cambo oil field development
By Oliver Gill and Rachel Millard
The controversial Cambo North Sea oil field development is among nearly 140 infrastructure projects the Government wants to get up and running “as fast as possible” as it bets the house on a dash for growth.
Five oil and gas developments have been named alongside road, rail, electric car, nuclear energy and other projects as being in line to benefit from major cuts to bureaucracy. Kwasi Kwarteng, the chancellor, said that infrastructure projects were “an essential foundation of growth”.
He added: "Our planning system for major infrastructure is too slow and fragmented. “The time it takes to get consent for nationally significant projects is getting slower, not quicker, while our international competitors forge ahead. We have to end this.
“We will streamline a whole host of assessments, appraisals, consultations, endless duplications, and regulations.”
The Government says it wants to get the “vast majority” of the named projects into construction by 2023 and is intending to fast track approval in order to deliver. Of the 138 projects published on the Government’s priority list, roads featured most prominently.
Some 86 different projects will be fast-tracked, from expanding A roads into dual carriageways to improving motorway junctions and building bypasses around villages such as Isham, Northamptonshire.
Seven offshore wind projects have also made the list, including floating projects that allow farms to put out in deeper waters.
Renewables, hydrogen, offshore wind and nuclear projects are a priority too. EDF’s Hinkley Point C and Sizewell C projects, set to be the first new UK nuclear plants in decades, are both named. Hinkley Point C is being built in Somerset while Sizewell C is still in funding talks.
Boosting domestic oil and gas supplies is another focus - with North Sea supplies set to play a key role - amid a greater effort to secure energy supplies in the wake of Russia’s war on Ukraine.
About 125km north-west of Shetland, Cambo has become a lightning rod for criticism from anti fossil-fuel campaigners, with oil major Shell pulling out of the project last year amid concern over delays.
The project is owned by Ithaca Energy. Other oil and gas projects named include BP’s Murlach oil field development and Harbour Energy’s Talbot field development.
Mr Kwarteng also said the “roads, railways, and networks that carry people, goods, and information all over our country” desperately needed to be improved if the UK was to meet its economic growth goals.
Sir John Armitt, chairman of the National Infrastructure Commission said: “Removing additional planning barriers to onshore wind developments in England is the right thing to do and recognises the major role that wind energy can play in boosting domestic production.
“We also need to put wind in the sails of other major projects, including offshore wind and water supply infrastructure, which serve the national interest while ensuring proper engagement with local communities.
“Crucially that includes publishing updated national policy statements for key infrastructure sectors as soon as possible, which will allow government to set out its strategic objectives and guide the priorities of regulators, industry and investors.”