Save for later Print Download Share LinkedIn Twitter The UK government has increased the windfall profits tax for North Sea oil and gas producers and extended it to low-carbon electricity generation companies as it seeks to close a gaping hole in public finances.UK Chancellor Jeremy Hunt said forecasts by the Office for Budget Responsibility (OBR) had shown the stark impact of global headwinds on the country's economy, which is "now in recession." Just under half of the UK's £55 billion ($65 billion) "plan for stability" will come from tax increases and the rest from spending cuts.Hunt blamed Russian President Vladimir Putin's "weaponization" of international gas prices for driving up the UK's collective energy bill by £150 billion compared with pre-pandemic levels. Household bills have soared too, causing distress for many families.Energy Profits Levy ExpandedAs widely expected, the chancellor raised the North Sea Energy Profits Levy by 10% to 35% from Jan. 1 2023, and extended it until the end of March 2028. That lifts the marginal tax rate on the sector to 75%. The original legislation included a sunset clause that would have ended the levy by 2025.The investment allowance for spending on new oil and gas extraction will be cut to 29%, while decarbonization expenditure will continue to qualify for the current allowance rate of 80%.Also as anticipated, the government imposed a temporary 45% levy from Jan. 1 on "extraordinary" profits reaped from low-carbon electricity generation.The levy will apply to revenue from power generation at an average price above £75 per megawatt hour (MWh). It will also be limited to companies that generate over 100 GWh and will only apply to extraordinary profits exceeding £10 million.Hunt said these measures would raise a combined £14 billion in the next fiscal year.Electricity prices in the UK and elsewhere in Europe have soared along with natural gas prices, but renewable power producers such as offshore wind farms are not burdened by the high costs that gas-fired power plants face.Gaping HolesAnalysts at Stifel blasted the North Sea tax measures."We see the outcome as being less investment, lower UK oil and gas production, higher carbon intensity, worse energy security, fewer jobs, and higher energy costs; the UK remains run by the short term for the short term," Stifel said in a note.MHA corporate tax expert Chris Denning highlighted what he described as "gaping holes" in the levy for renewable power generators. "Given that almost 25% (in 2020/21) of UK household energy bills consist of government subsidies for renewables, one might ask whether the [levy] is poorly targeted," he said."This is particularly so as a large proportion of the offshore wind farms that operate on the UK continental shelf are owned and operated by non-UK based multinationals that are benefiting from government subsidies," he added.Confidence Is KeyShell said that "the energy sector needs confidence that there will now be a stable investment climate following a period of considerable uncertainty."The company plans up to £25 billion of investment in the UK over the next 10 years in low-carbon energy and oil and gas. However, it avoided paying the windfall profits tax in the third quarter because of heavy investment in North Sea projects.Ahead of Thursday's budget announcement, BP's UK country head Louise Kingham said the constant fiscal changes "keep you on your toes." "Clearly when change comes through, you have to go back and look at the numbers and review investments. And we have been doing that throughout all this change," she told a London conference. "For every $3 we make, we pay $2 in tax."BP had previously warned that tax changes could upset its plans to invest £18 billion in the UK energy system through 2030. Other Key Budget MeasuresThe government also announced on Thursday that it will proceed with the new Sizewell C nuclear plant. Contracts for initial investments will be signed with relevant parties, including EDF, in the coming weeks. The government’s £700 million investment is the first state backing for a nuclear project in over 30 years.From 2025, electric vehicles will no longer be exempt from vehicle excise duties, but tax rates for cars provided to employees by their employer will continue to be taxed at a lower rate if they are electric vehicles. The government reaffirmed the commitment it made at the COP26 climate conference in Glasgow to reduce UK carbon emissions 68% by 2030.It also pledged another £6 billion in funding from 2025 to improve UK energy efficiency, effectively doubling the current budget for the initiative. It aims to reduce energy consumption from buildings and industry 15% by 2030.