Labour’s ‘bold new energy plan’ to freeze energy prices for six months is neither brave nor a plan. The idea is politically astute, as a recent poll shows, 75% of the public like the idea of paying less better than paying more, even if it means paying later. This is unremarkable; the populist delusion that everyone can vote for someone else to pay their bills is as old as socialism. In this case the £29bn policy is to be part-funded by extending, backdating, and removing deductions from Sunak’s spring windfall tax on the North Sea, and part-funded by additional borrowing.
The first element makes a bad policy worse. We are in an energy supply crisis. The pandemic return and war in Ukraine means there is a gap between demand for oil and gas, and global supply. It is particularly acute in Europe, given our regional dependency on Russia. The ‘windfall’ profits accruing to suppliers reflect necessity; it will take 20-30 years to dent our dependency on the source of 80% of our primary energy needs. There is no short-term fix and, longer term, we need more investment in supply. Investment that will be damaged by higher taxes, more uncertain taxes, and the removal of investment incentives. Starmer’s proposal manages all three.
In addition, there were already two ‘windfall’ taxes on the North Sea prior to the crisis. Had the Government done nothing, the returns to the North Sea Fiscal Regime was set to jump by 800% between 2021-25 and raise £21bn. Experimenting with raising the rates previously (early 80s and 2000s) led on both occasions to a collapse in investment and tax returns some years later. Labour’s plan would accelerate that process, at the very time we need billions pouring into the North Sea and onshore to secure domestic supplies. Every molecule drilled here is one that the UK is not then importing from Saudi Arabia, Qatar or being used to enrich others. Every molecule drilled here can be taxed and used at home, or exported, creating resources to fight rather than fund the Russian war machine. Bizarrely, in the one area where there is justification for a new windfall tax, gains of 100% or more by renewable generators benefiting from Labour’s old renewables policy that links reward to the price of gas power with an added subsidy, the party responsible has nothing to say. Reflecting a bias towards choosing technology outcomes rather than helping reduce costs – an issue highlighted in the IEA’s recent ‘Carbon Conundrum’.
The policy has also been attacked from the Left. Universal price controls mean everyone subsidises the highest energy users most. Future taxpayers on low incomes will be paying to heat energy executive’s swimming pools this winter as much as to prevent the elderly dying from the cold. A more progressive proposal is targeted welfare, and the most affordable way is to use the schemes we already have, whether UC or the Warm Homes Discount. Price controls also deaden the price signal. Energy markets respond to higher prices by encouraging lower usage, investment in efficiency and supply substitution. At these prices if the Government did nothing, we would still expect to see a sharp increase in renewable projects, domestic investment in insulation and heat pumps, and reduction in frivolous uses of energy, such as running private pools.
The policy does nothing for businesses who sit outside the price cap while still being forced to pay for the UK’s Net Zero agenda. It’s already the case that the most energy intensive businesses are exempted from most of this to remain competitive. With the energy share of costs rising for all, far more businesses, particularly in manufacturing will become marginal prospects, causing wider economic damage. Damage that will be amplified, when inevitably the freeze is extended, with prices falling more slowly as Labours assault on fossil supply impacts future output. Second when there are wider demands for other price controls in an expanding list of ‘essentials’ from food, to water, transport and housing. Third when their preferred Net Zero supply-side options prove less affordable than hoped and create an increasing dependence on very expensive standby and storage options to avoid blackouts and freezeouts.
Labour will quickly find they ‘run out of other people’s money’ and there is no solution to a cost of living crisis that focuses on prices rather than the fundamentals of costs, productivity and the innovation that improves both.
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Andy Mayer is Chief Operating Officer and Energy Analyst at the Institute of Economic Affairs.