Consultation outcome

Discussion note: Energy Profits Levy - Energy Security Investment Mechanism

Updated 22 November 2023

Background

On 9 June 2023, the government announced the Energy Profits Levy (EPL) Energy Security Investment Mechanism (ESIM) to give the oil and gas sector certainty to raise capital and invest in new and existing projects, securing affordable and reliable domestic energy supply and protecting some of the 215,000 British jobs the sector supports. It will mean that EPL will remain in place until March 2028 unless oil and gas prices fall to historically normal levels for a sustained period. If that happens, the tax rate for oil and gas companies will return to 40%, the rate before the EPL was introduced.

On 12 June 2023, Exchequer Secretary to the Treasury Gareth Davies MP laid a Written Ministerial Statement confirming the introduction of the ESIM. This confirmed that the EPL will permanently be disapplied if average oil and gas prices are both at or below the ESIM price threshold for 2 consecutive quarters. The ESIM price threshold was calculated using a 20-year historic average to the end of 2022 and is set at $71.40 per barrel of oil and £0.54 per therm of gas. The government will introduce legislation to remove the EPL if the ESIM is triggered.

Whilst the key parameters of the ESIM have been set, the government would like to engage with a variety of stakeholders to discuss the technical detail and practical application of the ESIM. Firstly, the government would like to build a better understanding of whether its preferred approach on the data source and parameters to calculate the reference price is appropriate. Secondly, the government would like to discuss the frequency with which it checks whether the ESIM has been triggered and the best approach to ending the EPL, as well as any transitional arrangements. Thirdly, the government would like to discuss the legislative approach to ending the EPL if the ESIM is triggered.

These discussions will inform a technical note that the government will publish setting out the details on how the ESIM will work to provide certainty to industry, financial institutions, and other stakeholders. Note – the elements of the ESIM already announced, including the level of the price thresholds and that both oil and gas thresholds must be met concurrently, do not form part of these discussions.

We would very much welcome written comments which can be sent to [email protected] by 11:45pm 1 September 2023.

Data sources and parameters

Data sources and parameters used to calculate the ESIM price threshold

The Brent benchmark is the most widely used benchmark price for oil, and as it is sold on the international market, it is priced in US dollars. These are the same parameters used by the Department for Energy and Net Zero (DESNZ) and the Office for Budget Responsibility (OBR). As such, the ESIM price threshold for oil was calculated using a 20-year historic average based on these parameters. To avoid the impact of currency fluctuations, the government opted to not convert the dollar price to sterling. The data source to calculate the ESIM price threshold was the monthly Brent crude oil nominal dollar price per barrel published by the World Bank (Crude oil, UK Brent 38` API).

The price for natural gas, on the other hand, is largely influenced by European gas markets, and so £ per therm was used to calculate the ESIM price threshold for gas. This is also the same parameter used by DESNZ and the OBR. The data source used to calculate the ESIM price threshold for gas was the 20-year average daily day-ahead prices produced by the Independent Commodity Intelligence Service (ICIS) and provided by DESNZ (NBP Price Assessment Day-Ahead Bid/Offer Range Daily Outright (Bid):GBp/th).

Proposed data sources and parameters for monitoring the ESIM price threshold

The reference price in relation to the ESIM is the price for oil and gas the government will use to calculate whether the ESIM has been triggered.

There are a variety of factors which impact the price of oil or gas that a company might realise for its sales. For example, the price may be affected by the blend and quality of oil. It can also be affected by whether a company hedges against future price shocks and guarantees a price and a buyer for their oil or gas months in advance. As such, the price a company ultimately receives for their barrel of oil or therm of gas – their ‘realised’ price – may be different to the ‘observed’ spot price on that given day (commonly known as the market price on a given day). For consistency and transparency, it is the government’s intention to use observed prices as its reference price when assessing whether the ESIM has been triggered.

Whilst there are a number of different organisations that publish a Brent oil and/or NBP gas price, there is little difference between them. Therefore, the government’s proposed approach is to use the same data source and parameters (i.e., monthly Brent crude oil nominal dollar price per barrel for oil using World Bank data and historic daily day-ahead prices and £/therm for gas using ICIS data) as was used to set the ESIM price threshold for the reference price. This approach ensures consistency with how the ESIM was set.

Question 1: Do you agree with the government’s approach on what data type, source and parameters to use as a reference price to assess whether the ESIM price threshold has been triggered? If not, what other data source or parameters would be more appropriate?

Monitoring the ESIM price threshold, when the EPL will end and transitional arrangements

The government has set out that the average price for oil and gas needs to be at or below the ESIM price threshold for two consecutive quarters in order for the EPL to be disapplied. In order to balance the administrative burden with providing a fair reflection of market conditions, the government will calculate the average price for oil and gas for the previous six months at the end of (or shortly after) every month. The ESIM will be triggered if the average reference price for both oil and gas is at or below the ESIM price threshold for the preceding 6 months. As the ESIM was announced on 9 June, the government will consider June 2023 as the first month when calculating whether the ESIM has been triggered.

Question 2: Do you agree with the proposed approach to assess whether the ESIM has been triggered on a monthly basis? If not, what would be more appropriate?

The EPL will be permanently turned off if the ESIM is triggered. There are a number of options on when the EPL will turn off following the ESIM being trigged (note – the government will only consider prospective options from the end of the 6-month assessment period and companies will still be liable to the EPL until the relevant legislation is in place).

1. From the date the ESIM is triggered
2. Within 3 months of the ESIM being triggered (for example if the ESIM triggered on 31 October 2025, the EPL will be disapplied no later than 31 January 2026)
3. At a set point (for example from the start of the following calendar or financial year)

Question 3: Do you have a view on the approach to when the EPL should be turned off if the ESIM is triggered?

Section 16 of the Energy (Oil and Gas) Profits Levy Act 2022 sets out the transitional provisions for accounting periods straddling 31 March 2028. The government proposes applying identical provisions to an earlier end date if the ESIM is triggered. As with the 31 March 2028 end date, any losses (including those generated by investment allowances) will not be able to be carried forward – as there will be no EPL liability to relieve. Likewise, expenditure incurred after the end of the EPL will not qualify for any investment allowances.

Question 4: Do you agree that the transitional arrangements should follow those already set out in section 16 of the Energy Profits Levy Act 2022?

Legislative options/design

Following discussions with stakeholders, the government will publish a technical note setting out the detail of how the ESIM will work and how the EPL will subsequently be turned off. If the ESIM is triggered, the government will make a Written Ministerial Statement to notify parliament that the EPL will end and introduce the necessary legislation to permanently disapply the EPL.

Question 5: Does the government’s approach provide sufficient certainty to industry/other stakeholders? If not, what would be more appropriate?

Question 6: Are there any additional transitional arrangements that may be needed if there is a delay between when the EPL is turned off and the necessary legislation being in place?

Thank you for taking the time to read this note.

Question 7: Do you have any other comments on the application or design of the ESIM that has not been included?

Summary of questions

Question 1

Do you agree with the government’s approach on what data type, source and parameters to use as a reference price to assess whether the ESIM price threshold has been triggered? If not, what other data source or parameters would be more appropriate?

Question 2

Do you agree with the proposed approach to assess whether the ESIM has been triggered on a monthly basis? If not, what would be more appropriate?

Question 3

Do you have a view on the approach to when the EPL should be turned off if the ESIM is triggered?

Question 4

Do you agree that the transitional arrangements should follow those already set out in section 16 of the Energy Profits Levy Act 2022?

Question 5

Does the government’s approach provide sufficient certainty to industry/other stakeholders? If not, what would be more appropriate?

Question 6

Are there any additional transitional arrangements that may be needed if there is a delay between when the EPL is turned off and the necessary legislation being in place?

Question 7

Do you have any other comments on the application or design of the ESIM that has not been included?