Millions of households are at risk of sliding into debt and poverty. Tens of thousands of businesses – potentially including seven out of ten pubs and six out of ten manufacturers – could go to the wall. Soaring inflation and a massive recession could squeeze living standards back down to 2003 levels. Civil servants have been planning for a worst-case scenario of rolling blackouts.
By any measure, energy prices are inducing a state of economic emergency, which is going to present the Government with some very uncomfortable, not to mention costly, choices and trade-offs over the coming months.
As I argued in a recent analysis for CapX’s parent organisation, the Centre for Policy Studies (CPS), the immediate priority needs to be protecting people and their employers from the worst of the energy price shock this winter. This is not just an economic imperative, but a political one: as James Frayne argues in the CPS paper ‘The New Majority’, the Government needs to show people that it is on their side, not least because many people ‘think the Conservatives are sitting idly by as their lives collapse around them’.
Reassuringly, the policies announced last week by Liz Truss shows that the Government grasps the scale of the crisis. The energy price freeze at £2,500 is open to criticism, but as my comparative analysis of the various approaches being pursued in different European countries shows, there is no magic solution or silver bullet to the mess we find ourselves in – just a series of difficult choices on how to combine household handouts, market intervention, business support, tax cuts and consumption policies so as to get us through the winter while doing the least amount of long-term economic damage.
Make no mistake, the energy price freeze is going to be enormously costly. Holding household energy bills at £2,500 for a year will cost around £29bn, even if energy prices rise no further than the October price cap. If energy prices rise in line with forecasts to over £6,000 next year, the cost to the Government – and eventually taxpayers or consumers – could rise to over £116bn a year. And that excludes the £40bn business support package announced by Liz Truss, not to mention the £37bn of household payments and targeted support already announced under her predecessor. That said, one of the advantages of a price freeze over direct transfers to households is that if wholesale gas prices do fall – as they have been in recent weeks – that could potentially significantly reduce the cost to the Exchequer.
Once we are beyond the immediate crisis and preparation for next winter is underway, the big question will be: how do we pay for this? Labour argues for a windfall tax on oil and gas producers in Britain, whose greedy shareholders – including most people with a pension plan – are supposedly profiteering from the crisis. That view is also pretty popular with the voting public, but it’s simply at odds with reality.
For starters, the numbers are nowhere near adding up. The 25% windfall tax on fossil fuel producers implemented when Rishi Sunak was Chancellor aimed to raise £5bn. Even raising this to 100% – which is obvious crazy – would hardly make a dent in the cost of the price freeze.
But more significantly, a windfall tax would be disastrous for energy investment – there are dozens of other regions all over the world in which energy companies can choose to invest instead of the North Sea. A windfall tax would destroy jobs, limit domestic oil and gas supply growth and undermine British energy security. On top of this, the infrastructure and skilled engineering workforce of the North Sea has a key role to play in Britain’s energy transition, for example via hydrogen. Undermining North Sea employers and supply chains would just hold back the green industries of the future.
Ministers should therefore be commended for resisting the pressure for a windfall tax that would have damaged the very investment we need to secure energy independence in the long term.
Instead, we need to pay for this crisis through the proceeds of economic growth – something which Truss clearly recognises. Beyond the immediate measures to get through the winter energy price crisis, the policies announced by the Government represent a hugely welcome pivot towards a pro-growth agenda aiming at energy abundance. The goal of making Britain a net energy exporter by 2040 is appropriately ambitious, and sets the country on the right path to greater control of our domestic energy supply through renewables, natural gas and nuclear energy.
Specific measures such as accelerating North Sea projects, ending the moratorium on fracking and recognising the ongoing role of natural gas in the energy transition are sensible and long overdue. In particular, producing more gas here will reduce our exposure to volatile global markets subject to manipulation by malign geopolitical actors. We look forward to hearing further details on renewables investment, including onshore wind and solar. As CPS director Robert Colvile has noted, onshore wind in particular has the potential to be both abundant and popular with local communities.
It’s also been welcome to hear Truss say she will end the short-term approach to energy supply and security, which in many ways is at the root of our current predicament. Nowhere is this better illustrated than in the now infamous 2010 clip of Nick Clegg pooh-poohing new nuclear power stations because they would not come online until 2022. At the time, eight plants were under consideration. But only one (Hinckley C, now due online in 2026) was given the green light under the Coalition. Yet even now, some politicians are happy to double down on the mistakes of the past 25 years, with Ed Davey saying that the Liberal Democrats will run on an anti-fracking platform at the next general election.
Thankfully, more sensible policy is now prevailing. One of the major barriers to investment in energy infrastructure in this country is the planning system and the sort of Nimbyism on which the Lib Dems thrive. This is an area that needs fundamental reform, and the Truss administration seems to recognise this, with a review into energy regulation part of her announcement. Hopefully this will not be just another can-kicking exercise.
Other encouraging elements of the Truss government’s pro-growth energy agenda are also now emerging. For example, reforms to City regulation, including around Solvency II, should help to unlock the private sector capital we need to help fund the next generation of energy infrastructure – from gas storage sites and nuclear power stations to upgrading the grid and plugging in decentralised solar fields and wind farms. But we should also look to go further, for example by following in the EU’s footsteps in classifying natural gas as a green fuel in the current review on the Green Taxonomy.
It would also be great to see reforms to the tax system to incentivise greater investment, including capital deepening in energy production, transportation and storage. New energy infrastructure should be permanently exempt from business rates, while full expensing – not just for plant and machinery, but also buildings and structures – should be introduced throughout the energy sector.
As the current crisis makes plain, cheap energy is intrinsic to the welfare and prosperity of individuals, families and the country as a whole. In the longer term, we need to aim for energy abundance, through growing renewables output, building more nuclear plants and – at least for a few decades – using fossil fuels offset by carbon capture and storage.
While the more proximate trigger for the winter energy crisis is Putin’s war in Ukraine, ultimately we are in a bad position because of over two decades of poor policy that deprioritised growth. Energy poverty is the result of policy decisions. We can be pro-growth and choose energy abundance instead. It is still early days, but that looks like the choice Liz Truss has made.
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