The UK Energy Profits Levy - A Theoretical Analysis

1. Introduction

The COVID-19 pandemic and Russia’s invasion of Ukraine have had a dizzying impact on the global energy market. The pandemic caused significant fluctuations in demand for energy, impacting the energy supply chain and price volatility.  Russia’s war exacerbated this, restricting supply to regions in Europe, causing prices to skyrocket around the continent due to the interlinked European energy market (Zakeri, 2022).

Both events have led to the worst energy crisis the UK has experienced since the 1970s and have seen oil and gas prices rise sharply over the last two years, placing increasing strain on households, whilst energy companies have enjoyed record profits. The energy crisis can be seen as a focusing event (Birkland, 1998), which has gripped the attention of the UK due to its severity and the mounting pressure for policy intervention.

This essay will focus on agenda setting and analyse the UK Government’s response to the crisis. The primary theoretical framework I will use to critically analyse the agenda setting response will be Kingdon’s Multiple Streams Approach (MSA) (Kingdon, 1984), with other concepts and theories employed to enhance my analysis. I will initially outline the problem and discuss how the issue has been framed by different actors, then explore the Energy Profits Levy (EPL) and use the MSA to help understand the process of agenda setting within the energy policy arena.

2. Background and Previous Policy

The energy crisis being faced by the UK can be attributed to a few causes; 1) the COVID-19 pandemic saw a significant spike in demand as the national lockdowns eased, pressuring supply. 2) The Russian invasion of Ukraine. Whilst the UK only imports about 4% of its natural gas from Russia, the country is exposed to international market forces, exacerbating the problem of rising costs (The Guardian, 2022). 3) A particularly cold winter in 2020-21 depleted the UK’s already low-capacity gas storage. These stimuli have caused the price of oil and gas to rise steeply, with wholesale increases levied against consumers as far as Ofgem’s price cap allows.

Throughout the worsening crisis households around the country have been exposed to increasingly higher energy bills and the ever-present threat of future increases following a government U-turn on the Energy Price Guarantee, now due to end in April 2023 (Money Saving Expert, 2022). Forecasts suggest that oil and gas profits in 2022 will be 70% higher than in 2021 (Fig. 1), due to the increased demand and rising prices (Cavcic, 2022). This focusing event forced the policy issue from the government’s systemic agenda to the institutional agenda (Birkland, 1998) and there was growing pressure on the government to turn its focus towards re-distributive measures aimed at levelling the playing field between big business and families around the country (Lowi, 1964).

3. How was the Issue Framed?

A multitude of different actors exist within the UK energy crisis debate, each holding differing perspectives and acting as either expanders or containers for policy intervention (Baumgartner and Jones, 1993). Stone’s typology (Stone, 1989) can be employed to analyse how different actors frame the cause of the energy crisis.

3.1 Government (Expanders)

The UK government was quick to shift blame onto the COVID-19 pandemic and the Russian invasion of Ukraine in early 2022 (BEIS, 2022), with particular focus being on the global disruption caused by Putin’s weaponisation of energy, inferring the crisis is an inadvertent result of these factors (Stone, 1989).

3.2 Offshore Energies UK (Containers)

Offshore Energies UK (OEUK) is a representative body for the UK oil and gas industry and have framed the issue as mechanically caused (Stone, 1989). OEUK oppose any re-distributive proposals and blame a lack of investment and a high tax burden on the likelihood that the problem will proliferate into the future; “gas production…will decline 75% by 2030 unless new fields are opened – leaving the UK increasingly vulnerable to global events that cause shortages and price shocks” (OEUK, 2022).

3.3 NGOs and Civil Society Organisations (Expanders)

Fuel Poverty Action (FPA) are a civil society organisation who have used the energy crisis to champion their message of energy equity. This is a common mobilisation of support seen following such events (Birkland, 1998). FPA, utilise three of Rochefort and Cobb’s framing categories; severity, proximity, and crisis to place blame with the Conservative government and the ‘big six’ oil and gas companies whom they accuse of intense lobbying (FPA, 2022).

3.4 Media (Expanders)

Media outlets who lie across the political spectrum frame the problem very differently. The Telegraph frames the problem as having arisen due to excessive interventionism of successive governments of the last 30 years and their failings to invest in domestic oil and gas production as well as alternative methods such as shale gas (The Telegraph, 2022). The Guardian on the other hand view the cause of the crisis as intentional (Stone, 1989), and having resulted from excessive government handouts to oil and gas firms, whilst neglecting support for UK households (The Guardian, 2022).

4. Government Policy Prior to the EPL

Prior to the EPL, companies engaging in oil and gas exploration in the UK were already subject to a high 40% taxation, consisting of 30% Ring Fenced Corporation Tax and a 10% Supplementary Charge. In the wake of the growing energy crisis, political pressure mounted to address the growing inequalities and due to the harmful and dramatic nature of the crisis, the political feasibility for an alternative policy option improved, opening a ‘window of opportunity’ for policy intervention (Birkland, 1998).

5. The Energy Profits Levy

The EPL, announced by former Chancellor Rishi Sunak and effective from 26th May 2022 introduced an additional 25% tax on oil and gas companies operating in the UK and UK Continental Shelf, raising the headline rate of tax to 65%. It is expected to generate £5bn in the first 12 months and the Chancellor emphasised that this additional revenue would be used as a re-distributive measure (Lowi, 1964) to help fund support packages for eight million vulnerable households. Understanding the opposition from certain interest groups, the government attempted to improve its political feasibility by writing into the legislation a sunset clause of 2025 or when prices ‘return to historically more normal levels’ (Evening Standard, 2022). The policy was also supplemented with an 80% investment relief which will see businesses receiving a 91p tax saving for every £1 invested (GOV, 2022).

6. Applying the Multiple Streams Approach

The MSA was chosen as the preferred and most relevant framework with which to conduct my analysis due to the presence of distinct problem, polity and policy streams that have helped mould the agenda setting process. A widely reported on ‘focusing event’ is present in the form of the energy crisis which opened a ‘window of opportunity’ for policy change, however a single or small group of policy entrepreneurs are not distinctly apparent due to the bi-partisan and public support for policy intervention (Kingdon, 2013).

Besides the use of the MSA, the Punctuated Equilibrium Theory (PET) could have also been a useful framework with which to analyse the government’s agenda setting, with its focus on statis over time due to the traditional status quo favouring institutions, punctuated by rapid change in policy following a trigger event, such as the energy crisis (True et al, 2019). The energy crisis is a relatively recent phenomenon, proliferating since 2020 and as such, the shorter-term, messier model of the MSA is utilised in this essay, due to its adaptation of the ‘garbage can model’ and emphasis on change in the presence of a ‘window of opportunity’ when the three streams align (Llamosas, 2018).

This essay has outlined and framed the nature and severity of the problem, with a focusing event and feedback helping to galvanise the problem stream and bring it into the government’s institutional agenda (Birkland, 1998). As such, I shall explore nuances within the politics and policy stream, whilst also assessing the window of opportunity that allowed policy intervention to take place.

6.1 A Contested Political Arena

At the start of 2022 pressure mounted on the government to implement a windfall tax on oil and gas companies. At the time the former Chancellor Rishi Sunak stated that such a tax was ‘superficially appealing’ but would ultimately deter investment (CNBC, 2022). The fresh calls were portrayed as a betrayal of conservatism by MP David Davis suggesting that increasing taxes goes against the central tenet of the Conservative party and focus on low taxes is required to avoid a period of ‘stagflation’ (The Telegraph, 2022).

The national mood proved a force to be reckoned with, with a study conducted by The Independent suggesting that 66% of conservative voters support a windfall tax on oil and gas giants (The Independent, 2022). The Labour Party offered a policy proposal to help dampen the crisis by proposing a windfall tax and the removal VAT on domestic bills (The Guardian, 2022). It was becoming clear that growing consensus for a windfall tax was in cahoots with the conservative ideology of lower taxation. From this political pressure, one can start to observe the three streams becoming aligned, making way for the critical juncture, and opening a ‘window of opportunity’ (Kingdon, 2013).

OEUK, and representatives from the oil and gas industry, most notably Shell’s Chief Executive Ben van Beurden unsurprisingly opposed further government intervention stating that increased taxation would put ‘investment at risk’ (Fraser, 2022). Much like the government’s U-turn with the implementation of the EPL, the narrative from Ben van Beurden shifted rapidly when in October 2022, speaking to the Energy Intelligence Forum he called on the government to introduce a windfall tax stating, “You cannot have a market that behaves in such a way…governments need to tax people in this room” (Kerr, 2022).

In May 2022, the government U-turned and introduced the EPL describing it as a ‘temporary, targeted Energy Profits Levy’ (The Guardian, 2022). The policy was softened to increase its political feasibility by introducing the investment allowance, a tax relief which provides companies with a 91p tax saving for every £1 invested.

6.2 Policy Stream

The idea of the ‘primeval soup’ introduced by Kingdon (1984) is not particularly relevant in the agenda setting process of the EPL due to the rapid nature of change and U-turns prevalent within this debate. Rather than the policy options being discussed and mulled over for years as with some policies, after analysing the timeline of events which led to this policy outcome, the nature and severity of the problem warranted that the policy be formulated and ‘softened up’ much more quickly.

Bi-partisan support for a re-distributive measure (Lowi, 1972) in the form of additional taxation was clear, and of all the tools within the government’s arsenal it was arguably the easiest to justify. With expanders of policy intervention within the government, media and civils society organisations, the government quickly fell in line and announced the introduction of the EPL.

6.3 Convergence of the Streams – A Window of Opportunity

The problem was evident and worsening. The national mood and the majority in parliament were in favour of policy change. Policy proposals were tabled. The streams had converged, and a ‘window of opportunity’ had opened.

On 26th May 2022, Rishi Sunak announced that the EPL would become effective immediately, and it was then retrospectively fast-tracked through both the House of Commons and Lords, achieving Royal Assent on 14th July 2022. The window of opportunity and the convergence of the three streams are a central part of the MSA’s explanation of policy change within a political institution (Meijerink, 2005). Taxation on oil and gas companies in the UK was already high. Energy prices had been rising since the COVID pandemic, however it only started to be framed as a ‘crisis’ in late 2021, as Russia posed for invasion and Ofgem’s energy price cap forecasts skyrocketed. Piece by piece these stimuli helped align the streams, encouraging the government to act and introduce this additional taxation.

7. Conclusion  

This essay has focused on agenda setting and used Kingdon’s (1984) MSA as a theoretical framework to analyse this process. The focusing event of the energy crisis was pivotal in affecting policy change in the form of the EPL. The MSA’s three streams; problem, politics and policy were clearly identifiable in the agenda setting process and the quickly developing nature of these three streams as well as widespread reporting on the issue makes for a compelling story of the agenda setting process. Rather than one policy entrepreneur being responsible for driving forward this change, this essay has demonstrated that a growing swathe of support from bi-partisan actors and the media has acted to advance the agenda. Whilst there were actors against such intervention, the voices in favour were much louder. The issue was framed in a variety of ways, and it was interesting to see the government shifting blame onto Russia, despite this only being a contributing factor to a complex problem. With the political turmoil being faced by the UK following the resignation of Liz Truss, this issue will need to be re-visited and further analysis undertaken to understand the future agenda setting processes in the ongoing energy crisis.