Government fears windfall tax might backfire on consumer energy bills

28 August 2008 / by Daniela Gieseler
Despite increased pressure from within the Labour party to impose a windfall tax on energy companies in order to help families struggling to pay their gas and electricity bills, the Government still seems to be reluctant to go ahead with the move.

As many as 70 Labour MPs have signed a petition to levy the tax on energy companies, some of which have made enormous profits this year, claiming the income would enable the Government to bolster their stretched finances and fund tax breaks for low-income families.

However, some, namely the Chancellor Alistair Darling, fear that the energy companies might just pass the cost of the windfall tax onto their customers, and indeed David Porter, CEO of the Association of Electricity Producers, warned:

"If you take money out of the companies, and they have to find it somewhere else, then their investment costs will go up and customers will have to bear the brunt of that. There is a serious risk that bills would go up."

Mr Porter added: "Every £1million you take out of each company through this legalised raid is £1million they have to raise elsewhere."

Also, the Government is reluctant to squeeze money out of the same companies they rely on to pay the £100billion needed to implement Britain's renewable energy strategy.

Accordingly, energy providers claim the tax would disrupt their plans to improve their infrastructure and invest in the future. "Last year we made just a whisker under £500million in the UK. That doesn't buy even one new power station," an npower spokesperson said.

"It is our plan to spend more money than we earn in the UK for the next ten years. That is a big commitment and if there was a windfall tax that is the sort of commitment that would have to be re-evaluated."

As an alternative to the tax, Gordon Brown is now considering imposing higher costs for pollution permits on the gas and electricity companies, which are issued under the European Union's carbon trading scheme.

However, this would only raise about £500million, a fraction of what is needed to help poorer families to pay their energy bills, but the cost of one potential option – giving out fuel vouchers of £50 or £100 to recipients of child tax credits – would alone cost £600million.

Some government leaders have also called for an annual levy on energy providers to contribute to a national home insulation programme, which would help half a million people out of fuel poverty and would be more effective than a one-time tax.

The Concerned Consumer survey, carried out by Populus, meanwhile has found that the increased gas and energy prices have forced a growing number of ethical consumers to set their environmental concerns aside.

The majority, who would have opted for 'green' energy in financially better times, have yielded to financial pressures and chosen the cheaper instead of the greener option.

© Fair Investment Company Ltd