Windfall tax may 'damage market'

Price rises have hit consumers and industry hard

A windfall tax on company profits would cause long-term damage to UK energy supplies, BP and Shell have said.

The idea of a windfall tax was raised during the first hearing of an enquiry into energy prices on Tuesday.

Prices have risen over the last year and consumer group Energywatch estimates an extra 800,000 consumers are facing hardship as a result.

MPs on the Trade and Industry Committee were questioning the oil giants and will be interviewing other suppliers.

Short-term rise?

Energy suppliers have blamed higher wholesale prices and declining UK energy reserves for price rises.

MPs want to know if these rises are a short-term response to higher prices or the start of a long-term trend.

Any change in the tax regime would dent confidence James Smith, chairman, Shell UK

At the hearing, MPs accused energy firms of making big profits at the expense of consumers and manufacturers.

According to Energywatch, the average domestic gas bill has risen by 20% in the past year while the cost of electricity has risen by 14% on average.

Meanwhile, manufacturers have seen their energy costs rise by an average 40% in the past year, with prices "spiking" by as much as 70% on one day.

Some say heavy gas users are facing charges that are 25% higher than those of their competitors in Europe. Ofgem says that despite these increases, the cost of a typical domestic bill is much cheaper than before privatisation.

Profit concern

Committee chairman Martin O'Neill believes a windfall tax may be necessary.

BP and Shell will publish their results at the beginning of February.

BP's Steve Peacock said a windfall tax "would destroy investor confidence in the North Sea".

"I think our best role is to continue to invest and prop up supply so that has a dampening effect on price increases," Mr Peacock said.

James Smith, chairman of Shell UK, reiterated this view. "Any change in the tax regime would dent confidence," Mr Smith told the committee.

Mr Smith also said it posed a threat to jobs.

Supply fears

By 2015, it is forecast that 75% of the UK's gas requirements will need to be imported.

Malcolm Webb, chief executive of the UK Offshore Operators Association (UKOOA), who appeared before the committee on Tuesday morning, said there was a degree of "nervousness" about future supplies.

"We have found all the elephant fields: ( in the North Sea) we are now after much smaller prey," he said.

BP representative Alan Haywood told the committee that prices had risen amid fears of a cold winter and subsequent high demand.

Many domestic suppliers, which will be grilled by the committee on Wednesday, have increased prices twice in the past year.