As the old joke goes, if I was going there I wouldn’t be starting from here. But the starting point for dealing with high energy prices is that we ARE here.
The crux of the problem is that the government has underinvested in domestic energy security. It has made fossil fuel investment difficult without creating enough non fossil alternatives, it has lacked storage and reserve supplies and, in a forlorn attempt to prevent customers from having to cope with the consumer price consequences of all this, has imposed a ceiling on the price of energy. The ceiling, which in effect forces companies to sell energy and in particular gas at prices below cost, has been associated with 24 suppliers covering more than 10% of households going out of businesssince 1 September 2021. One of these companies, Bulb, has been put into ‘special administration’ as it accounts for about half (1.7 million) of these households.
The ceiling is reviewed every six months. When it was last reviewed, the direct debit tariff (there is a separate prepayment tariff) cap was set at £1,277, up from £1,138 half a year earlier for a household with typical energy consumption. The wholesale gas price element was set at £528, up from £373 six months earlier. Although the wholesale price of gas is volatile, it is currently running at about double its level before the October cap was set. If this continues then the appropriate cap will be up by 45% from its level last October to £1,851, adding £17.2 billion to the annual cost of living. The energy weight in the Consumer Price Index is currently 3.3% so this would add 1.5% to the total index.
In an ideal world the government would not have taken responsibility for the price of energy by setting a cap. But having done so, it’s hard to see how a politically weak administration can get away with allowing its electorate to face such a sudden increase. It is likely that it will find it hard to avoid some mix of subsidy and compensation. Our suggestion is that the subsidy (perhaps operated through a temporary VAT suspension) should be based on that element of the current price which is assessed to be temporary and expected to disappear when the market conditions return to ‘normal’. In addition, the proportion of spending on energy for the poorest 20% of the population at 7.5% is not far off twice that of the average household (4.2%). So a large rise in the cost of energy for this group, which will not be fully factored into the level of payment until April 2023, should surely be compensated for by an interim supplementary rise in Universal Credit by 3.3%. Suspending VAT on energy and fully compensating universal credit recipients for the higher cost of energy until it is automatically added into the universal credit uprating will cost together about £3 billion in the financial year 2022/23 but these costs are meant to be temporary.
But these short term sticking plasters do not solve the real problems. In reality, we will have to live with expensive energy as part of the net zero transition. There is little case for removing the various levies on fossil fuels (the revenues have already been spent) since this would have the same impact as the suggested VAT suspension but be much less easy to reverse. Instead, policies need to ensure a better energy balance. Some of these could have an effect in months – e.g. tax incentives to increase output in the North Sea; others would take up to five years like allowing fracking and allowing new investment in the North Sea (including possibly removing the Scottish government’s veto on such developments); still others like further investment in a much wider range of renewables such as tidal range and tidal stream, on- and offshore wind, solar, small modular nuclear, increasing total generation capacity (necessary if transport and gas are going to be electrified), increased energy storage and even some new gas fired generation as backup for the growth in renewables would take longer to pay off – perhaps ten years.
All of these will be necessary if we are to prevent the current problems not just from continuing but from getting so bad in the coming years that we either shut down factories or let the lights go out.