PwC Energy media briefing - December 2022

“Welcome to our December energy media briefing. As an unseasonably milder Autumn took some pressure off European supply concerns at least in the short term, discussion and focus has increasingly turned to next winter. With the expectation that energy prices will remain high for the medium term, regardless of any possible developments in Ukraine, governments across the continent are implementing measures to address energy consumption.”

“Here in the UK, it was good to see the government’s ‘It all adds up’ campaign launched this month with a focus on educating and informing domestic consumers around their energy use. Business users will need to wait for more clarity on what the next phase of government support will look like until early in the new year, which will not be helpful to financial forward planning as we end 2022.”

“To move beyond the current challenges, the only solution is continued efforts to manage demand, alongside sustained supply-side investment. In that context, it remains to be seen how the UK energy industry will  digest the changes made in the Autumn Statement to the Energy Profits Levy and the newly introduced Electricity Generators Levy, and how this will impact on investment and retiral decisions in the UK.”  

Drew Stevenson, Leader of Industry, Energy, Utilities and Resources, PwC UK.

“The government’s ‘It all adds up’ campaign is welcome, but may provide limited help to households managing their energy usage during this period of high energy bills and cost of living over the winter months” says Vicky Parker, Sector Leader for Power and Utilities, PwC UK:

“October saw the introduction of the Energy Price Guarantee, which protects households from being fully exposed to high wholesale energy costs over the winter - saving a ‘typical household’ in Great Britain c. £900 over the undiscounted energy price cap. That said, the unseasonably mild weather this Autumn (the third warmest on record) has meant that households have been able to mitigate their exposure to higher energy bills through reduced consumption.

“However, the cold snap experienced at the start of December has led households facing a cost of living crisis having to manage consumption whilst keeping their homes warm. In response to the challenge, and on top of existing bill support, the government announced their ‘It all adds up’ campaign, which outlines measures that households can take, including encouraging households to reduce their boiler flow temperature to 60℃, turning down radiators when rooms aren’t in use and draught-proofing windows and doors.

“National Grid ESO and a number of suppliers are also responding - five tests of the new demand flexibility service, which rewards consumers for reducing demand at times of peak system usage have been conducted already this Winter. National Grid estimates this has delivered more than 780 megawatt (MW) hours of demand reduction, and £2.8m in savings.

“While these measures will help, many households, and not just the most vulnerable ones, will have to make difficult decisions about their energy heating. This is partly exacerbated by the general level of insulation within the country’s housing stock. The government has pledged £1bn to address this problem through the launch of the ECO+ scheme, which will target improvements in energy efficiency for those households who are not currently eligible for support and builds on the existing £6.6bn ‘Help to Heat’ scheme. However, the programme will not commence until April 2023, meaning that many will also be hoping for a milder winter.”

“Additional stress and high prices caused by the December cold highlights the extreme tightness of structural supply” adds Rob Turner, Energy and Resources Sector Leader, PwC UK: 

“While we would expect prices to come back down once this cold period moves away, the outlook for 2023 is continued supply tightness, and thus more periods of price volatility. 

“The UK and Europe had a really favourable run-in to winter, with an exceptionally warm September and October helping build a supply buffer. This also gave a brief respite in terms of prices. However, the flip from exceptionally warm to exceptionally cold demonstrates the ongoing supply challenges, with prices for gas and electricity now spiking well above the levels seen in the 2021 energy crisis. Solving this requires a response at a massive scale, with the upside in the medium term of accelerating alignment with the energy transition and Net Zero. 

“In the short term, and particularly in Europe, more measures are likely to be required to contain demand, while some consumption will continue to be curtailed by high prices, as has been seen this year with reduced output in energy-intensive and gas-reliant industries, representing a sustained economic and competitive challenge for 2023. 

“Recent statistics from Germany have highlighted the challenge, with cold weather pushing December demand up to 90% of prior year levels, and so, a long way off the 20% reduction which Germany believes is necessary to bridge the Russian supply gap. Germany can rightly celebrate bringing in new LNG (gas) import capacity this month, which is an extraordinary achievement in under a year, but Germany and Europe will need many more similar success stories to maintain the momentum into 2023. 

“This continued supply problem, combined with the huge direct costs to governments like the UK and Germany which have, at least in the short term, decided to subsidise the cost of energy to the consumer, should focus the minds of planners over the Christmas period to revisit ideas on how to manage the ongoing supply challenge in 2023.

"With the focus on gas supply, it has been easy to miss some more positive inflationary news from the liquids markets, with Brent crude ending the year trading down at around $80 per barrel, well down from highs of over $100 this year. Brent remains one to watch, with forecasters showing a very wide range of views on how the year could play out, with the key dependencies being whether the global economic slowdown could keep prices down, while hope for a return to growth from a Chinese 'post-covid bounce' is pushing some forecasters to see a return to prices back over $100 again in 2023."

Finally, Head of Tax in Aberdeen, Mairi Massey, reflects on November’s Autumn Statement and the changes to the Energy Profits Levy:

“On 17 November, the Chancellor announced an update on windfall taxes impacting the energy sector. The existing Energy Profits Levy, which affects upstream oil & gas businesses, will be amended from 1 January 2023 to an increased rate of 35% (previously 25%), giving companies in the sector a combined headline tax rate of 75%. In addition, investment allowance against the EPL will reduce from 180% of spend to 129% (which has the same cash impact under a higher EPL rate) however, companies incurring decarbonisation expenditure will still receive a deduction at the 180% rate. Finally, the sunset clause will be changed to reflect an end date of 31 March 2028, rather than 31 December 2025.

“The Chancellor also announced another new tax to take effect from 1 January 2023 until 31 March 2028, which will impact some electricity generators - the Electricity Generators Levy. The EGL will apply to businesses (standalone companies or corporate groups) generating more than 50 GWh per annum of electricity from nuclear, renewable and biomass sources in the UK and connected to a national grid or local distribution network. In scope businesses will be subject to a 45% levy on a measure of ‘Exceptional Generation Receipts’.

“The suggested benchmark price is £75 per MWh. Draft legislation has just been published, with enactment taking place in Spring 2023. Based on analysis from the published guidance note, EGL is expected to be an ‘above the line’ item, and not part of the tax charge for reporting purposes.

“Meanwhile, various EU territories are implementing windfall taxes following announcements in September requiring member states to do so. You can read more here on windfall taxes, and here for recent price cap developments in the Netherlands, which apply from 1 December 2022.”