The Energy Profits Levy (EPL), the windfall tax on UK oil and gas profits was always supposed to be temporary. Successive governments have nonetheless extended its life. Despite promises to introduce its permanent replacement, continuing geopolitical uncertainty and bumper oil and gas profits may prolong the EPL further.
The EPL in brief
Introduced as a temporary measure in 2022 at a rate of 25% by then Chancellor Rishi Sunak as a response to the extraordinary profits being generated by the oil and gas sector following Russia's invasion of Ukraine, the EPL rate has since climbed to 38%. Its sunset clause has been pushed back repeatedly, most recently to 31 March 2030 by Finance Act 2025. The end of the EPL will be brought forward if the average prices of both oil and gas over a reference period fall below certain thresholds under the Energy Security Investment Mechanism (ESIM), but that prospect is now increasingly remote.
The government has announced plans to replace the EPL with the Oil and Gas Price Mechanism (OPGM), a 35% revenue-based tax triggered when oil exceeds US$90/barrel or gas exceeds 90p/therm, and for which the government says it intends to legislate in Finance Bill 2026–27.
The geopolitical climate
At Budget 2025, the government stated it expected the ESIM might be triggered within a few years. Then, on 28 February 2026, the US launched Operation Epic Fury against Iran. The Strait of Hormuz, through which roughly 20% of global oil supply flows, has been effectively closed to most commercial shipping since late February, triggering one of the most severe supply shocks in modern energy market history.
The impact on prices has been dramatic. Brent crude broke the US$100/barrel mark for a period, and prices are likely to remain volatile despite recent falls towards more normal levels. Similarly, wholesale gas prices rose by 28% in three months. The World Bank's April 2026 Commodity Markets Outlook projected energy prices to increase by 24% this year - the first annual rise since 2022 - and warned of exceptionally high average prices for Brent crude if disruptions prove more protracted.
Closer to home, Ofgem has announced a 13% increase to the energy price cap from July, taking a typical household's annual bill to £1,862 and with gas bills alone rising by 24%.
Recent government engagement with industry
Reports suggest that at meetings with industry in March 2026, Rachel Reeves indicated she had shortly planned to announce an end to the EPL but that the outbreak of the Iran conflict had stalled this. Industry is disappointed: it wants certainty and says the EPL is hitting jobs and investment.
Our view: expect the EPL to stay
We think the Starmer government was intending to postpone the OPGM and extend the EPL, citing geopolitical instability and price volatility. Three factors drive this view:
Consumer politics. With household energy bills rising 13% from July, scrapping a windfall tax on oil and gas companies would be a hard sell politically.
The pattern. The EPL's sunset clause has been extended repeatedly. There is little to suggest this pattern will break whilst oil trades near US$100/barrel.
Uncertainty. Longer-term fiscal certainty for industry is difficult to offer when the geopolitical picture remains this volatile.
However, given the current political uncertainty following the announcement of Starmer's resignation, it is unclear how the successor government will develop its energy policy, and whether that will provide any relief for the North Sea oil and gas sector to encourage financial investment.
Other Authors: Natalie Gunner, Associate
