The government has introduced new legislation to discourage energy company owners from closing out energy hedges owned by energy providers on the brink of collapse.
On 28 January 2022, the government announced that it was taking action to counter the risk that companies holding derivative contracts and other assets might take steps to realise profits from those assets, thus putting extra strain on the energy provider’s business. This would have the result that the Government and energy customers suffer the resulting loss while companies profit, which would be unacceptable to Government, a government website explained.
Background to the new tax
Many energy suppliers in the UK operate as intermediary companies in that they buy energy (gas and electricity) on the wholesale market to sell to their customers.
The recent sharp rise in the cost of electricity and gas has left those companies that took out options on acquiring electricity or gas at a fixed price in a position to sell those option contracts at a handsome profit.
If the energy provider subsequently goes bust, the government generally tries to find another supplier to take on the insolvent company’s customers but the new supplier is likely to have additional, unanticipated costs with supplying these new customers; in particular, the new provider is unlikely to have taken out any derivative contracts in respect of these new customers to protect it against the increase in wholesale energy prices, so it usually requires a sweetener, paid for by the taxpayer, for the company to take on the customers.
The documentation pertaining to the new levy said the government has become aware that there is a structural risk in the regulatory regime whereby assets such as hedges could be held separately to the energy supply business, including in another company in the same group. As a result, the benefit of the assets could be separated from the business.
“The government considers it unacceptable that the company enjoy this kind of windfall when the taxpayer and energy consumers are picking up the associated costs. It is for this reason the government considers it necessary to introduce the Public Interest Business Protection Tax,” the statement from the government said.
The Guardian newspaper reports that the levy was introduced last week in response to industry concerns that Stephen Fitzpatrick, the founder of Ovo Energy, could use his majority stake in the company to liquidate Ovo’s long-term gas contracts and quit the supply market with a handsome profit.
It is thought that BP PLC (LSE:BP.) might have already done something along these lines with Pure Planet, in which it had a 25% stake, before the loophole was closed.
Ovo Energy said it supported the new levy and that it had “been clear for some time that action was needed” to help protect households and taxpayers, The Guardian reported.