All week we have been highlighting our new Prime Minister’s daunting in-tray. But their first task on entering Number 10 will be dealing with our energy crisis. Cornwall Insights, an energy consultancy, predicts that the energy price cap will hit £6,600 next April. Not only is that up from £1,300 in only March last year, but it is a further huge leap from the rise to £3,549 announced last week.
With academics from the University of York predicting that more than three quarters of households could face fuel poverty this winter – meaning they are shelling out more than 10 per cent of their income on energy bills – we are going to see millions unable to pay without government intervention. For all Truss’s vocal faith in tax cuts, opposition to rationing, and paens to fracking, the package of support that she will have to announce – as our likely next Prime Minister – must be much wider reaching.
But before we embark on the specifics of what the Government should do, it bares analysing the basic problem. As in all economics, it is a case of supply and demand. Post-Covid, the global demand for energy has bounced back much faster than the supply. Persistent under-investment and governmental indifference meant that we were heading for a crisis even before Vladimir Putin’s tanks rolled into Ukraine. But with us boycotting Russian oil and gas – for good reasons – that crisis has been exacerbated.
We did not make the mistake of many of our European neighbours and rely disproportionately on Putin for our energy needs. We chose the reformed Vikings of Norway, over the gangsters of the Kremlin. But with Oslo facing dwindling reserves of hydro-electric power following this summer’s droughts, limitations to exports are likely. And because we import 60 percent of our gas for household and business energy use, we will be competing with the rest of Europe for a smaller energy pool.
If the Government does nothing, we face chaos. I have written before about the likelihood of bill boycotts, blackouts, and families and businesses going under. This is a wartime situation, and it deserves a wartime level of response from Number 10. Like a war, it will also be extraordinarily expensive. But leaving cost to one side, we must address how the Government can reduce demand, increase supply, and ensure that energy bills will be paid.
First, reducing demand will require a concerted Government campaign to get the public to use less energy. This is not rationing. But trying to maintain usual levels of demand whilst supply is so constrained brings the risk of frequent blackouts. We should copy the member states of the European Union in aiming to reduce our demand for gas by 15 per cent compared to average consumption in the past five years. Every little helps, to coin a phrase.
Despite my frequent drawing of parallels with the Heath government, we are not (currently) heading for a three-day week. But individuals and families can more easily reduce their use than businesses or public services. The Government must launch Covid-style briefings and a mass advertising campaign to get across to the public the urgency of the situation. It must make advice on reducing energy use readily accessible. Stockpiling jumpers will be this year’s stockpiling bog roll.
In addition, we must embark on a crash program of insulation designed to assist the most vulnerable and those with the leakiest homes (if logistically possible). The failure to improve insulation in this country is a national embarrassment. We waste more household energy than any other country in Europe, and we consume gas at twice the European average. Cutting waste is a clear way to cut demand.
The benefit of hindsight also shows up our failure to increase energy supply. If ministers had been sensible, we would have made an emergency push to start fracking months ago – and would have embarked on a French-style push for nuclear decades ago. But right now, pointing this out is as much help as suggesting the White Star Line should not have branded the Titanic unsinkable.
We must pull every lever we can to boost energy supplies in the short-term. So far this year, UK gas producers have reportedly increased supply by 26 per cent compared to last year and increased our imports of liquid natural gas by almost half. We have also kept the Drax coal-fired power station open. If we want to maintain electricity supplies, we need to go further, and find any facility no longer in use that can be reopened and do so.
Obviously, with our response to the war in Ukraine central to surging prices, voters may lose enthusiasm for supporting Kyiv as they feel the pinch. As Truss is unlikely – for clear moral reasons – to start pushing Zelensky to come to terms with Putin to cut our gas bills, then we must work with allies to co-ordinate supplies. Let’s avoid a trade war with the EU this winter. We are all facing the same problems.
These suggestions address the national picture. We also must mitigate the crushing effect this crisis will have on households and businesses. Its enormous cost aside, Labour’s proposals for capping bills are misguided. By removing the price mechanism, it does not encourage the public to use less energy. It also helps everyone, when this is a crisis that will disproportionately hurt those on middle and lower incomes. It does have the virtue of simplicity – always useful in a crisis.
Similarly, Truss’s apparent proposal to cut VAT is simple. But it also represents a misdirection of funds towards providing universal help, rather than concentrating support on the worst hit. Our focus should be on delivering as much assistance as possible to them as quickly, efficiently, and cost-effectively as possible. If this seems like breaking from sainted free-market principles, open your eyes: through price caps and other tinkering, we do not have a free market in energy in this country.
The package we provide for households should extend that announced by Rishi Sunak earlier this year. With bills rising higher and more quickly than expected, the £400 Sunak announced for everyone and the up to £1200 available for the most vulnerable households will be far from sufficient and will need to be increased. His successor (but one) must also make up for his failure to raise Universal Credit in line with inflation. They should also introduce a further Covid-style uplift.
For businesses, since they are not protected by price caps, inaction will see many go bust. If the Government expects prices to remain permanently higher, these businesses will not have survived in the long-term anyway. This shock also comes after a decade of zombie companies being kept artificially alive through low interest rates. A bit of enforced belt-tightening would not be wholly bad.
But asking businesses to fend for themselves is simply callous when they face such extensive hikes in fundamental costs – and we would like an economy to come back to, once this Omnicrisis is over. So a Covid-style series of loans and grants must be on the cards. And extending business rates relief to premises with a rateable valuable of £25,000 (from a value of £15,000) – as Truss is apparently floating – is a much better use of funds that subsiding the bills of millionaires or cutting VAT.
Of course, the elephant in the room is how this will be paid for. With the UK’s debt-to-GDP ratio already at almost 100 percent, these measures will require – on top of the huge cost of financing any other tax cuts or spending increases Truss has planned – borrowing tens of billions more at an ever-increasing cost. This will mean spending cuts and tax rises in the longer-term – if our growth remains anaemic. Boosting that will make all these problems more manageable.
So, as ever in British politics, what we really need to do is build more houses.