Definition of windfall profits

Sudden and massive profits that come to an industrial or sales actor. These appear when there is a large gap between sourcing prices and selling prices.

Windfall profits can be revealed thanks to a rapid rise of prices in a sector, where assets and capacity of production are fixed and already financed. A new regulation or tariff system can also lead to this phenomenon.

These profits are unexpected and by nature not directly foreseen by the concerned actors. Windfall profits could be seen as a business opportunity. Regulators and government traditionally think about setting up specific taxes (called windfall profit taxes) to capture a part of this value creation.

Example

In the electricity industry, the rapid rise of European prices on the competitive market in 2004 and 2005 lead hydroelectric and nuclear power producers to a very attractive position.

The debate also occurred a few years ago with the impact of free CO2 allocation in the electricity prices. It has been criticized for having generated windfall profits to power suppliers. [1]

See

Article: Nuclear industry windfall feared

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