On Thursday 8th September, Britain’s new Prime Minister Liz Truss set out her approach to solving the energy crisis to Parliament. Detail remains limited, however most attention has been paid to an energy price freeze. UK prices for power and heating have almost tripled since last year, driven principally by a 10-15 fold increase in the price of natural gas. The Government will limit this to a doubling or £2,500 for typical household energy bills, akin to 8% of average incomes until the end of 2023. By targeting wholesale prices they will limit prices for both businesses and households, although the business scheme is limited to six months before it is targeted on exposed sectors.
This is very expensive, the exact impact depends on unpredictable movements in commodity prices, but predictions between £90-170bn are common and £120bn most cited or twice the cost of the furlough scheme. The policy will work, relieving the worst impacts of the expected crisis. Current forecasts of £6-7,000 a year or 20% of income, would be unsustainable for most. But it would be better to use existing measures, increasing welfare for the vulnerable, and cutting taxes for the better off and businesses.
The appeal of price controls is immediate visible impact. However this is a crisis of energy supply; to resolve it requires people investing in new sources of gas, alternative supply, energy efficiency and reducing flippant use. Removing the price signal reduces pressure on both, prolonging the crisis, and increasing the cost and duration of the scheme. Morally it means middle-class welfare, subsidies for executive hot tubs and leaky homes, at the expense of future taxpayers. It will limit current inflation (a 5% reduction is claimed) and business failures, but at the expense of much more of both tomorrow. Politically it moves the “Overton window” to the left, creating permission for the socialist Opposition to campaign for more price controls, notably on food, water, and transport.
Positively the Government has reversed a five year campaign to leave domestic oil and gas in the ground. The moratorium on UK fracking has been lifted and the new North Sea licences announced. Green levies, mostly expensive overpayments for old renewables will be suspended, and their impact limited by holding down wholesale prices. The Opposition’s calls for a fourth windfall tax on the North Sea have been rejected. There is a £40bn scheme to redress price volatility, and two reviews, one into energy regulation that seeks ways of prioritising security and affordability. Another into aligning Net Zero with a pro-growth agenda led by a self-declared free-market environmentalist. Both reviews will be crucial in determining whether the UK’s significant internal barriers to improving supply can be overcome.
The package is not the kind of assault on Britain’s socialised energy system that will cheer growth purists. The relief elements are one of the largest and most poorly targeted Government interventions in British history. On the supply side it continues to walk a line between competing interest groups, for example by limiting the fracking revival with a plea for community consent. It doesn’t confront reality that legally binding commitments to Net Zero are meaningless if they get ditched in a crisis, or might be used to undermine pro-growth policies through the courts. But it is a significant move away from ideological dogma of the previous decade, the costly consequences of which have left the UK sitting on 50-100 years of solutions to energy supply, while dependent on others. So one cheer for fracking, one cheer for the change of direction, and fingers crossed that events will reduce the cost of the socialist price freeze.
Andy Mayer is Chief Operating Officer and Energy Analyst at the Institute of Economic Affairs.
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