Treasury brings in super tax to prevent energy owners cashing out
The Government has subtly introduced a new “super tax” to deter energy company owners from cashing out lucrative gas contracts bought in advance, before leaving their supply business to go under.
The Treasury hurriedly pushed through laws last week, amid growing fears Ovo Energy founder Stephen Fitzpatrick could exit the market and leave customers in the lurch.
According to The Guardian, there were concerns within the industry that Fitzpatrick could use his almost two-thirds stake in the company to liquidate its long-term gas contracts, and drop out of the supply business with a hefty profit.
Downing Street will now impose a 75 per cent tax on any future windfall that an energy company shareholder could hope to make by cashing out gas contracts while leaving millions without a supplier.
The super-levy will be known as the public interest business protection tax and has been ushered to provide a safety net for household bill payers and the public purse, that would otherwise have to bail out customers left behind.
When approached for comment, a spokesperson for Ovo Energy told City PM the firm was in favour of the latest measures, which it believed would support the UK energy market.
She said: “We support this, and other recent announcements intended to strengthen the resilience of the Uk energy retail market. It has been clear for some time that action was needed to protect consumers.”
The supplier also called on more clarity from the government over any potential plans to reduce costs for consumers, with Ofgem set to meet on February 7 to discuss hiking the price cap.
She added: “However, with now under a week to go until we hear the scale of the increase to the price cap, we still are not clear on what – if anything – the government will do to help support vulnerable customers. We hope this announcement is a sign of further initiatives to come to resolve the current energy crisis.”
City PM further understands the new tax could be a reaction to the actual sale of hedges from a number of failed energy suppliers, amid suggestions the loophole was used by BP- which owned almost a quarter of Pure Planet before pulling the plug on the challenger brand last October.
When approached for comment, BP told the newspaper it “took no action” to terminate the wholesale contract or liquidate hedges until Pure Planet had decided to appoint administrators due to its insolvency.
A spokesperson said: “After terminating the wholesale contract, in line with industry practice, any value realised from unwinding the contractual hedges was used to first repay what we were owed under the contract, for example, for unpaid delivery of commodities and power. Beyond this, any value is being transferred to the administrator to manage – BP will not retain any net value.”
New measures announced amid deepening energy crisis
The industry has suffered from market carnage over the past four months, with suppliers unable to pass on soaring wholesale costs due to the limitations imposed by the consumer price cap.
Investec reported last year that households could be on the hook for up to £3.2bn to cover the cost of finding a new supplier for the two million households affected by the collapse of energy suppliers since the start of September, and for the further 1.7 million customers of Bulb Energy, which has entered de-facto administration.
While many of the suppliers that went bust did not have long-term hedging arrangements, those that did buy gas in advance, before markets reached record highs last year, have discovered the value of the contracts has rocketed.
Energy bills are expected to increase by as much as 50 per cent in April when Ofgem reviews the price cap.
Cornwall Insight recently released forecasts expecting the price cap to rise to nearly £2,000 from its current rate of £1,277 per year for average use.
This is the steepest bill increase since the cap was introduced in 2019.
The government has been in talks to soften the blow to households, with proposals varying from £500 direct cash grants to public money loans to the energy sector. However, no measures have yet been agreed.
Market regulator Ofgem has revealed it will also introduce financial stress tests and hedging controls, to ensure suppliers are more resilient to future market shocks.
Ovo Energy recently faced criticism over its decision to cut staff following its acquisition of SSE, alongside blowback on social media over its money-saving advice for customers.
This included recommendations to cuddle pets and do star-jumps to reduce heating usage over the winter.