Windfall tax means less certain energy supply, warns SSE chief

Alistair Phillips-Davies - Ross Johnston/Newsline Media
Alistair Phillips-Davies - Ross Johnston/Newsline Media

The Government's windfall tax has placed the UK’s energy supply at risk this winter, according to the boss of energy giant SSE.

Alistair Phillips-Davies says SSE may need to reduce the output of its hydroelectric plants in January and February to avoid the tax.

“That will mean there's probably less certainty of supply over the absolute peak,” he warns.

The tax charges a 45pc levy on certain low carbon electricity generators’ sales above £75 per megawatt-hour. It was introduced following months of soaring electricity prices, a knock-on effect of Russia’s war on Ukraine, which has boosted generators' profits but fuelled the cost of living crisis.

However, Phillips-Davies says it damages the economic viability of running hydroelectric plants at certain times.

Months of speculation about introduction of the tax weighed on SSE’s share price, but there is now some relief in certainty. SSE’s stock is up 4.18pc year to date, valuing the company at around £18bn.

Despite warnings from industry that the new tax would harm investment, SSE is pushing ahead with plans to invest £12.5bn in the UK by March 2026, and potentially £24bn over the decade.

That cash will go towards beefing up its vast network of UK wind farms, electricity cable networks, gas-fired and hydro-electric power plants, and developing carbon capture and hydrogen, as it gets behind the Government’s push for cleaner energy.

“Let's get whatever legislation needs to be done, done,” says Phillips-Davies. “Let's get it out of the way. [...] The £12.5bn out to March 2026 is a fully-funded plan, even with the windfall tax.

“And we still feel very confident that we can make that £24bn investment. Maybe our ability to expand that £24bn isn’t as high as it would have been. But we're still there, we're still ready.”

On Friday SSE raised £1.5bn towards those plans by selling a 25pc stake in its Scottish electricity transmission business to the Ontario Teachers’ Pension Plan Board. Next in line is the sale of a stake in its electricity distribution business, with the process starting in the New Year.

Market turmoil and speculation about windfall taxes has “shaken the confidence of investors in the UK,” says Phillips-Davies, with “fatigue” setting in. “We'll give a little bit of time for everything to settle down.”

The 55-year-old, who has run SSE since 2013, announced plans to sell the stakes last November as he faced down an attack from legendary hedge-fund Elliot, which publicly demanded SSE break itself up into separate renewables and networks businesses.

Phillips-Davies insisted at the time that halving the company’s scale would do nothing to help it tackle the complex challenges of developing renewables. After a year marked by huge energy market volatility and gas shortages due to Russia’s war on Ukraine, he insists the strategy now looks “stronger than ever”.

“We’ve developed more options and more opportunities for the UK. We think we've got an excellent model - we’ve absolutely no plans to split up,” he says. “I suspect Elliott is very pleased with their investment in us. The company has performed well.”

Elliott has publicly gone quiet over its stake, but SSE may yet well find itself a prime bid target at a time of huge flux in the energy system. Oil giants such as BP and Shell are both pushing into wind farms, and may find they’d like some electricity networks to go with it as well.

Phillips-Davies bats away the suggestion. “The best way to run a defence is just to run a good business. I’m focused on the plan [...] I can’t say I’ve spent a lot of time on defence planning.”

Corporate swoops are not the only source of potential disruption to the sector. With a general election potentially two years away, a Labour government is a looming possibility.

Is Sir Keir Starmer’s plan for a “zero carbon” electricity system by 2030, five years ahead of the Conservative government’s plans, realistic? “Decarbonising the electricity sector by 2030 will be pretty ambitious,” says Phillips-Davies. “Fifty gigawatts of offshore wind will be a big challenge and networks to connect that up is going to be a big challenge.”

But he says he’s “certainly not going to knock the plan” having not yet had a chance to discuss it with Labour. He may soon have a chance to do so: He is listed to appear at a business conference due to be held by Labour in London in December, introducing a panel discussion on Labour’s industrial strategy.

Opportunities are also opening up further afield. In the US, Joe Biden’s administration is luring billions of pounds of investment in renewables with a massive package of tax credits and incentives, sparking concern the US will suck investment out of the UK and Europe.

SSE has opened an office there and will go for good opportunities, says Phillips-Davies. But he notes Europe is “really committed to the path of renewables and clean green flexible energy … [which is] absolutely in our sweet spot”.

“America could be good,” he adds. “Why not. But I think equally America, ultimately, if it needs to have cheaper energy, it'll continue to frack and and indeed, if it has to, dig coal as well.”

Alistair Phillips-Davies, CEO of SSE - Ross Johnston/Newsline Media
Alistair Phillips-Davies, CEO of SSE - Ross Johnston/Newsline Media

For now though, there is winter to get through. With the cuts in Russian supplies of gas to Europe, National Grid has warned of the risk that owners of gas-fired power stations might not be able to get enough gas to run their plants. Does SSE have enough for its own fleet?

“We've had a relatively mild and high renewable [energy] start to the winter,” says Phillips-Davies, which has helped maintain gas stocks and depress prices. “We’ll definitely do our bit to make sure all of our plants are available and running as well as possible. We’ll be there for the [National] Grid whenever we can be.”

He is doing his bit at home to save energy, he notes. “When war broke out last year, I turned the thermostat down by a degree in the house.

“My wife is going to have to go find her collection of gilets. It’s the first time in a long time she didn’t shout at me about it, which was nice.”