Energy Profits Levy and the Energy Security Investment Mechanism discussion note - summary of responses
Updated 22 November 2023
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This publication is available at https://www.gov.uk/government/consultations/energy-profits-levy-and-the-energy-security-investment-mechanism-discussion-note/outcome/energy-profits-levy-and-the-energy-security-investment-mechanism-discussion-note-summary-of-responses
Chapter 1: Introduction
The government introduced the Energy Profits Levy (EPL) on 26 May 2022 to respond to exceptionally high prices that meant oil and gas companies were benefiting from unexpectedly high profits – above and beyond what they could have forecast to earn. The rate of the levy is 35%. This 35% rate is in addition to the 40% headline tax rate in the permanent regime, bringing the combined headline rate of tax for the sector to 75%. Before the announcement of the EPL Energy Security Investment Mechanism (ESIM), the end date for the EPL was 31 March 2028.
The EPL ESIM was announced on 9 June to give the oil and gas sector certainty to raise capital and invest in new and existing projects. In this announcement the government confirmed that the end date for the EPL remains 31 March 2028 but that the levy will permanently be disapplied earlier if average oil and gas prices both meet or fall below the ESIM price thresholds for 2 consecutive quarters. The government has used a 20-year historic average to the end of 2022 to calculate the ESIM price thresholds, which are set at $71.40 per barrel of oil and £0.54 per therm of gas. The ESIM will ensure that if prices fall and return to historically more normal levels, the EPL will be abolished. This will mean the headline tax rate for oil and gas companies returning to 40%, the rate before the EPL was introduced.
Following the announcement, the government laid a Written Ministerial Statement (WMS) in Parliament confirming the above ESIM details and that further information would be published on how the mechanism will work. This was followed by the publication of a discussion note which considered the remaining design of technical aspects of the ESIM and how the mechanism could be implemented.
The purpose of the discussion note was to invite views from a wide range of stakeholders to ensure ESIM delivers its intended policy objective whilst reflecting the factors that shape oil and gas companies’ and lenders’ investment decisions. Stakeholders were able to contribute views to the discussion note from 18 July 2023 to 1 September 2023. Alongside this the government also held engagement sessions with the oil and gas and banking sectors to discuss their views on the issues set out in the discussion note.
This document summarises the responses to the discussion note and the government’s position on the issues explored in the note. A total of 14 responses were received via email. Most responses came from oil and gas companies operating in the UK and on the UK Continental Shelf. There were also 3 responses from trade associations, one response from an accountancy firm, one response from an environmental body, and one response from a bank. There were no responses submitted that were considered collectively as part of a campaign.
The following chapter sets out the government’s detailed response, taking on board stakeholder feedback where appropriate and setting out how this has helped shape the final ESIM design and implementation. Chapter 3 outlines further steps the government is taking alongside the publication of this summary of responses, including the publication of a technical note that sets out the final detail and practical elements of how the ESIM is being implemented.
Chapter 2: Responses by topic
A summary of responses and the government response is given in the following sections, by each topic covered in the discussion note.
Data sources and parameters
The government invited views on which data sources and parameters should be used to calculate the ESIM reference prices. The reference prices are the prices for oil and gas that the government will use to calculate whether the ESIM has been triggered.
Question 1: Do you agree with the government’s approach on what data type, source and parameters to use as a reference price to assess whether the ESIM price threshold has been triggered? If not, what other data source or parameters would be more appropriate?
There were 12 responses to this question from across the oil and gas sector, trade associations and the banking sector. All responses which included a preference indicated agreement with the government’s preferred approach on the data source and parameters for the gas price. Three responses did not indicate any preferences, with one suggesting the parameters chosen for the ESIM thresholds do not need to be identical to the ones used to monitor market prices and that it would be important to ensure the ESIM is simple and transparent.
Most respondents disagreed with the government’s preferred approach on the data source for the oil price on the basis that the oil price data published by the World Bank is available monthly and could consequently cause a delay between prices falling sufficiently for the ESIM to trigger and the calculation of the reference price. Those respondents advocated a daily price monitoring approach and for the reference price to be calculated daily using a 180-day rolling average.
To facilitate implementing this approach, the alternative suggestion of those respondents was the use of daily price data from a Price Reporting Agency (PRA), with most respondents generally noting a need for clarity on which benchmark was to be used. In addition, as an alternative to data from PRAs, one respondent suggested the HMRC North Sea Reference Price[footnote 1] could be used to calculate the ESIM (oil) reference price but noted that as HMRC currently publish this information monthly, the timing of future publications would need to be significantly accelerated.
Government response
The government welcomes the strong support for the proposed parameters and data source for the gas price and confirms that it will calculate the reference price for gas in £ per therm using daily day-ahead prices[footnote 2] produced by Independent Commodity Intelligence Services (ICIS). This is the same data source and parameters used to calculate the ESIM price threshold for gas.
The government also notes that the majority of respondents favoured the use of PRA data to enable daily price monitoring for oil but has decided to proceed with the intended approach of using the monthly Brent crude oil nominal dollar price per barrel published by the World Bank.[footnote 3] This is the same data source and parameters used to calculate the ESIM price threshold for oil. Further detail on the government’s position on the frequency of checks is set out in the response to questions 2, 3 and 4.
Monitoring the ESIM price threshold, when the EPL will end and transitional arrangements
The government invited views on the frequency of ESIM checks, when the EPL should be switched off in the event of the ESIM being triggered, and what transitional provisions should apply in the event of EPL being switched off early.
Question 2: Do you agree with the proposed approach to assess whether the ESIM has been triggered on a monthly basis? If not, what would be more appropriate?
There were 13 responses to this question, with one abstaining from indicating a preference. Two respondents agreed with the government’s preferred approach of monthly checks and indicated this would be reasonable and appropriate. However, as above, most respondents preferred daily price monitoring rather than calendar month, arguing a daily check using a 180-day rolling average would be fairer by minimising the time for the ESIM to trigger after its thresholds are met.
Question 3: Do you have a view on the approach to when the EPL should be turned off if the ESIM is triggered?
There were 14 responses to this question. Of these, 4 preferred EPL to be turned off on the day ESIM triggers. The majority of respondents commented that if the ESIM triggers, no windfalls will have been made during the preceding 6 months, and therefore the EPL should be turned off from the start of this period.
In general, some respondents noted there would be practical implications from turning off the EPL and these are noted in the responses to Question 4. One respondent commented that the EPL should be able to be turned back on again pending the outcome of the oil and gas fiscal regime review (which has considered how the regime will respond to future price shocks after the EPL ends).
Question 4: Do you agree that the transitional arrangements should follow those already set out in section 16 of the Energy Profits Levy Act 2022?
There were 12 responses to this question. Of these, 5 agreed with the government’s approach. The remaining responses did not raise objections with applying section 16 as a starting point but recommended additional transitional provisions. These included allowing any unused investment allowances to be made available within the permanent regime, a replacement decarbonisation investment allowance, enhanced loss carry back rules and a zero-rate of EPL to allow losses generated after the EPL has been turned off to be utilised.
Government response
The government welcomes the range of views provided on the above proposals.
Whilst the government notes calls for daily price monitoring, a balance needs to be struck between the administrative burden for all parties of monitoring an indices based on daily price fluctuations and ensuring the reference price provides a fair but stable snapshot of market conditions at the point of being calculated. This is to ensure prices have fallen consistently, and for a sustained period, before the EPL ceases. In addition, the government notes that it could be possible for one-off but non-persistent price shocks to have a disproportionate impact on the reference price if it is calculated daily, which could lead to EPL ceasing when subsequently prices remain high.
Beyond arguments in favour of ESIM triggering more quickly, the government does not consider sufficient evidence has been provided indicating the potential investment benefits of a daily price monitoring approach. Accordingly, the government is inclined to maintain its original position and will proceed with a monthly check at the end of each month.
The government notes that most respondents preferred for ESIM, if triggered, to cease at the start of the assessment period but that this was outside the scope of options under consideration in the discussion note. However, noting that it would be unfair for the EPL to continue being charged for a period after ESIM triggers and the negative financial impact this would have on companies in an environment where prices will have returned to normal, the government has decided that the EPL should cease on the day ESIM triggers. This will ensure the headline tax rate for the sector reverts immediately to 40% when the conditions for ESIM to trigger are met.
As respondents did not express any objections to the use of the EPL’s existing transitional arrangements, the government will align the transitional arrangements for the levy, if it ceases due to ESIM, with the arrangements set out in section 16 of the Energy (Oil and Gas) Profits Levy Act 2022. The government’s position on calls for further transitional arrangements is set out in the response to questions 5, 6 and 7.
Legislative options/design
The government invited views on its proposed approach to publish a technical note setting out the detail of how ESIM will work and how EPL will be turned off if ESIM triggers, and its commitment to introduce the necessary legislation to permanently disapply the EPL and notify this to Parliament via a WMS. The government also invited views on whether further transitional arrangements would be needed in addition to the provisions already set out in the EPL primary legislation.
Question 5: Does the government’s approach provide sufficient certainty to industry/other stakeholders? If not, what would be more appropriate?
The majority of respondents (11) called for the introduction of legislation as soon as possible or in the current Parliament to codify the ESIM in law, stating this would help mitigate concerns that the EPL may not be turned off if the mechanism triggers or that a future government could renege on the ESIM commitment. Of these respondents, some were concerned that there could be a significant delay between ESIM triggering and the necessary legislation being introduced to turn off the EPL. One respondent suggested introducing legislation would be more appropriate than a technical note, as technical notes are usually published by HMRC to clarify aspects of legislation. Two respondents refrained from commenting on this particular question.
In general, 2 stakeholders highlighted that any legislation would need to consider the impact on existing EPL investment allowances, in particular the decarbonisation allowance.
Question 6: Are there any additional transitional arrangements that may be needed if there is a delay between when the EPL is turned off and the necessary legislation being in place?
Most responses (8) to this question advocated introducing legislation as soon as possible to ensure the EPL turns off if the ESIM triggers rather than at a later date and commented that a commitment to introduce legislation in future leaves too much uncertainty. Three respondents did not comment on this question.
Two respondents noted the need for any transitional arrangements and legislation to consider the impact on decarbonisation projects as the EPL decarbonisation allowance will no longer be available if the EPL is turned off, with one suggesting the government’s review of the long-term fiscal regime should consider how to ensure decarbonisation projects continue being adequately supported.
Question 7: Do you have any other comments on the application or design of the ESIM that has not been included?
The discussion note invited stakeholders to raise other points on the implementation or design of the ESIM.
Respondents made a wide range of comments relating to the design of the EPL, the level of the ESIM price thresholds and the consequences for the EPL investment allowances in the event of EPL being switched off early.
In general, most respondents mentioned the impact of cost inflation on companies’ operating environment and that this should be reflected in the ESIM by raising the price thresholds each year or each month in line with inflation. Some respondents noted consideration would need to be given to the impact on investment expenditure related to decarbonisation projects in the event of the ESIM triggering, commenting that it would be important for decarbonisation projects that are sanctioned before ESIM triggers to retain an enhanced investment allowance. A small number of respondents commented that the design of the EPL does not target windfall profits and that ESIM is unfair to companies that predominantly produce oil or gas as the mechanism cannot trigger unless both commodity prices fall for a sustained period.
Government response
The government introduced ESIM to give the oil and gas sector certainty about the future of the EPL while prices remain elevated, and notes the volume of feedback requesting that legislation be introduced as soon as possible due to a lack of sufficient certainty. In particular, several respondents noted that investors would be unlikely to take account of the ESIM if the mechanism is not legislated. The government has heard these concerns and in response has decided to introduce legislation in due course and following further technical consultation to ensure the EPL is switched off if the ESIM triggers. This will be in addition to the technical note that has been published alongside this document (see Chapter 3) and will help give stakeholders further certainty about the government’s commitment to ESIM.
The government notes that many respondents called for additional transitional provisions to reduce the impact of the EPL decarbonisation allowance no longer being available if ESIM triggers and EPL is switched off early, or to allow for loss relief against earlier EPL liabilities. The investment allowances within the EPL were introduced to help mitigate the impact of the levy’s additional tax burden by giving companies further investment incentives. The government is therefore of the view that it is proportionate to switch off these incentives when the EPL ceases and notes that companies will be able to continue claiming the tax reliefs, allowances and losses within the permanent regime.
Finally, the government recognises that higher oil and gas prices may have had an impact on the production costs of the oil and gas sector due to elevated global energy demand following the COVID-19 pandemic. In light of this, the government has decided to also adjust the ESIM price thresholds in line with inflation in future years. Future adjustments to the thresholds will be based on an annual measure of Consumer Prices Index (CPI), starting from April 2024 and using the preceding December’s CPI figure.
Chapter 3: Next steps
Alongside this summary of responses, the government has published a technical note setting out the technical details on how ESIM has been designed in response to the points covered in the discussion note and explaining the steps government will take to check if the mechanism has triggered. In addition, the government will publish draft legislation for a technical consultation and introduce legislation to give effect to the ESIM as soon as parliamentary time allows, giving the sector further certainty and strengthening the government’s signal of support for investments while the EPL remains.