When the UK government introduced the Energy Profits Levy in May 2022, the move was pitched as a straightforward fix.
Oil and gas prices had soared after Russia’s invasion of Ukraine, public energy bills were climbing, and energy groups were posting record profits. A “windfall” tax would skim off the excess and ease the burden on households. Simple politics, simple economics...or so it seemed.
But nearly three years on, the numbers are starting to tell a different story. And it provides a cautionary example of the unintended consequences of government intervention; particularly for Labour, which increased the tax last November to 38%.
In a sharply worded note this week, analysts at Stifel argue the levy has not only failed to deliver the revenues originally envisaged, but has actively harmed the UK’s energy security and investment outlook. The policy, they say, now risks undermining the very fiscal base it was designed to shore up.
A windfall that never quite arrived
Oil prices have fallen by 50% since their 2022 highs. Wholesale gas is down 80%. The result, Stifel points out, is that there has been no lasting “windfall” to tax.
While energy companies have paid more in the short term, the longer-term effect has been to make North Sea investment deeply unattractive. Capital is fleeing, rigs are idling, and the government’s own projections for future tax receipts look increasingly optimistic.
Stifel estimates the Office for Budget Responsibility’s current forecast for tax receipts to 2030 is overstated by £10 billion, as falling production and disinvestment shrink the tax base.
In their words, the UK North Sea industry is “being destroyed by taxes that are too high”, a warning that echoes a broader industry concern that fiscal uncertainty is now the greatest barrier to development.
The security risk beneath the seabed
Energy security is not just a buzz phrase. It is infrastructure, jobs and insurance against geopolitical shocks. North Sea gas, which still supplies a significant share of UK peak winter demand, is declining at a pace that Stifel believes will leave the UK importing up to 85% of its gas needs by 2030.
That reliance on imports carries cost, volatility and political risk, a far cry from the government’s stated ambition of greater energy independence.
Even under the most optimistic scenarios for renewable energy deployment, Britain will still need gas well into the 2030s. The current tax regime, the note argues, is not hastening the transition to cleaner energy. It is simply exporting the UK’s carbon footprint and energy sector employment to other producers, from Norway to the US.
A call for energy pragmatism
The message from Stifel is clear. The windfall tax is not a sustainable solution. It is a blunt tool that made short-term sense during a crisis but now demands reassessment.
The firm argues that scrapping the levy would trigger a rebound in investment, ultimately delivering a larger tax take over five years, safeguarding jobs, and reducing reliance on foreign gas.
Energy policy rarely lends itself to easy choices. But in an era of heightened geopolitical risk, volatile markets and an urgent need for orderly energy transition, the real cost of discouraging domestic production may soon outweigh the headline gains of punitive taxation.
In Stifel’s view, it is time for what they call “Energy Pragmatism”, a shift from populist optics to policies rooted in security, stability and long-term value.