Countering profiteering in the energy market

Profiteering from volatile energy prices. Record profits from the UK’s two largest oil majors led media headlines in recent weeks, as fossil fuel giants continue to benefit from the global energy crisis. We know where these profits are coming from, but where are they going? And with a form of windfall tax already in place, what more can be done to ensure more of this windfall is diverted into alleviating the cost of living crisis facing ordinary households?

• Follow the money. First, the facts. Common Wealth calculated that Shell made £32bn profit in 2022 - 107% more than the previous year and the largest in the companies 115 year history - as fossil fuel companies continue to reap windfall benefits from higher wholesale gas prices. £20bn (62%) of Shell’s profit was extracted by private shareholders, 7.5 times more than their investment in ‘low carbon’. Similarly, BP made £23bn across 2022 and have announced a new round of share buybacks - where a company buys more of its own stock to artificially inflate its value on the stock exchange - taking the total buybacks to £9.35bn. (And no, this isn’t paying our pensions. UK pension funds only own 0.2% of Shell and BP’s shares, so these payouts arguably aren’t benefiting ‘average pensioners’.) 
• Why is this a problem? The reason these profits have sparked such outrage is partly because of the scale, but mainly because they are not the result of anything these companies have done. They truly are a ‘windfall’- a boon for companies due to factors outside their control- and are being paid for directly by high energy prices facing consumers. 
• It’s a Net Zero issue. Common Wealth’s Mat Lawrence explains that “the ability to control the economic surplus and decide on the direction of investment” is critical for creating a net zero carbon energy system needed for the UK’s 2035 target. For instance, BP has since reduced its pledge to cut emissions and planned “a greater production of oil and gas over the next seven years compared with previous targets.” 

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What can the government do about profiteering? Labour has been calling for a stricter windfall tax in response to capture some of the unearned rents and use it to fund household support for the rising cost of living. Last year, Tax Justice UK modelled how a 95% tax on excess profits could raise £12.9bn instead of the £5bn planned in the government's original estimates. But other policies also exist which can disincentivise profiteering and other extractive behaviours from taking hold in the economy.

• Taxing share buybacks of energy companies. If we want the oil giants to genuinely invest in the green transition then it would make sense to disincentivise other possible uses of their windfall profits like share buybacks. Taxing these buybacks would also raise revenue that could be used to fund additional cost of living support. IPPR and Common Wealth have calculated that a tax on BP and Shell’s buybacks could raise nearly £5bn a year. IPPR’s George Dibb argues that share buybacks are “a symptom of a firm that can identify no productive investments beyond boosting their own value.” Shreya Nanda explained why share buybacks are part of a wider cycle of business failure in this thread.

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Publicly-owned energy companies? Nationalisation has been a topic of discussion in relation to the energy system ever since privatisation, and it is no surprise that the scale of these profits should spark the conversation again. However, unlike public ownership of energy retail companies or the energy networks, nationalisation of the oil majors is complicated by the risk of passing over billions in stranded assets onto the taxpayer. (Progressive Britain’s Tom Collinge argues that nationalisation may be too expensive for the current energy crisis, but energy security “cannot be left to the market”, and nationalisation must be recognised as “a long term, structural, solution to long term, structural problems.”)

• Setting up new energy generators. Labour’s plan for creating Great British Energy (GB Energy) does not involve nationalising any existing companies. Instead, GB Energy would enter the market as an energy producer that would compete with private firms. Though operationally independent, GB Energy would have a mandate to invest in clean energy, which it could do individually or in partnership with the private sector. Labour hopes that GB Energy would be able to make riskier investments, such as new tidal technology or modular reactors, that the private sector may often “shy away from”. Common Wealth’s Mat Lawrence said that public ownership of energy was “superior and more affordable” due to the state’s ability to invest in clean energy technology at lower rates and the fact that it would not have to consider shareholder interests. TUC research has found that “If the UK today had a public energy champion like EDF (France), EnBW (Germany), or Vattenfall (Sweden), the UK government could use the excess profits made – equivalent to between £2,250 and £4,400 per UK household – to reduce bills and accelerate home insulation roll-out.”

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Profiteering throughout the UK energy system. Profiteering is not just limited to energy generation. Common Wealth’s latest explainer details how profit is extracted at every stage of the UK’s privatised supply chain through extraction, generation, transmission, distribution and supply. Nationalisation could be more fruitful in natural monopolies of energy transmission and distribution.

• Energy transmission and distribution. The National Grid owns and operates long-distance transmission infrastructure and charges a “network cost” on household bills. Other research by Common Wealth found that the business paid investors nearly £9bn in dividends and share buybacks schemes in the last five years. The government has already planned to partly nationalise the National Grid (a division called the Electricity System Operator) to give the government more control over “the challenges posed by decarbonisation.” However, the rest of the National Grid will continue to be owned shareholders (which counts the fund managers BlackRock, Vanguard and the Abu Dhabi Investment Authority among its top five shareholders).
• Energy distribution. Electricity is regionally distributed along network infrastructure owned and operated by Distribution Network Operators who also charge for “network costs”. Common Wealth briefing finds that the Gas Distribution Networks and Distribution Network Operators “enjoy the highest profit margins of any sector in the UK” and “in the case of both gas and electricity distribution, just a small collection of companies have more than 90 percent market shares”. 

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Tackling profiteering in the rest of the economy. Profiteering is not limited to the energy system either. Unite’s Profiteering Commission accused many FTSE 350 companies of price gouging and argued that profiteering pushed a ‘second round’ of inflation last year: “This isn’t just about oil companies or a few “bad apples”. Even excluding energy firms, FTSE 350 company profits increased by 42% between 2019 and 2021.”

• E.g. housebuilding. The FT’s Jonathan Eley notes that “UK housebuilders’ profitability [are] no less remarkable than BP’s returns” as the UK’s largest housebuilder, Barratt Developments, reported similar returns as BP but paid a far lower tax rate. Dividends paid by the largest nine housebuilders rose from an aggregate of £400 million around the time of the financial crisis to £1.8 billion in 2017. (See this peer reviewed article for evidence of value extraction amongst the UK’s major housebuilders.) ‍
• Taxing share buybacks. IPPR calculated FTSE 100 companies announced £55bn share buybacks in 2022, and that a 25% tax on them could raise £13.5bn a year. They also note that President Biden recently introduced a share buyback tax to discourage price gouging and help alleviate the cost of living crisis in the US.