Millions of households are at risk of sinking into debt and poverty. Tens of thousands of companies, including potentially seven out of ten ads and six out of ten manufacturers – could go to the wall. Soaring inflation and a massive recession could reduce the standard of living down to 2003 levels. Officials have forecast a worst-case scenario of power outages.
By any measure, energy prices are inducing a state of economic emergency, which will present the government with very uncomfortable choices and trade-offs, not to mention costs, over the next few months.
As I argued in a recent analysis for CapX’s parent organization, the Center for Policy Studies (CPS), the immediate priority must be to protect people and their employers from the worst energy price shock this winter. This is not just an economic imperative, but a political imperative: as James Frayne argues in the CPS article “The New Majority”the government needs to show people it’s on their side, not least because many people “think the Tories sit idly by as their lives crumble around them”.
Reassuringly, the policies announced last week by Liz Truss show that the government grasps the magnitude of the crisis. The £2500 energy price freeze is open to criticism, but as my comparative analysis of the different approaches taken in different European countries shows, there is no magic bullet or silver bullet to the mess we are in find – just a series of difficult problems. choices on how to combine household aid, market intervention, business support, tax cuts and consumer policies to get us through the winter with the least damage long-term economics.
Make no mistake, freezing energy prices is going to be extremely costly. Keeping household energy bills at £2,500 for a year will cost around £29billion, even if energy prices do not rise more than the October price cap. If energy prices rise as forecast to over £6,000 next year, the cost to government – and possibly taxpayers or consumers – could rise to over £116billion a year. And that excludes the £40billion business support package announced by Liz Truss, not to mention the £37billion in household payments and targeted support already announced under its predecessor. That said, one of the advantages of a price freeze over direct transfers to households is that if wholesale gas prices fall – as they were in recent weeks – this could potentially significantly reduce the cost to the Treasury.
Once we get past the immediate crisis and the preparation for next winter is underway, the big question will be: how are we going to pay for this? Labor is pushing for a windfall tax on oil and gas producers in Britain, whose greedy shareholders – including most people on pensions – are meant to profit from the crisis. This view is also quite popular with the voting public, but it is simply at odds with reality.
For starters, the numbers don’t add up. The one-off 25% tax on fossil fuel producers put in place when Rishi Sunak was chancellor was aimed at raising £5billion. Even raising that figure to 100% – which is obviously insane – would do little to lower the cost of freezing prices.
But more importantly, a windfall tax would be disastrous for energy investments – there are dozens of other areas of the world that energy companies can choose to invest in instead of the North Sea. A windfall tax would destroy jobs, limit the growth of domestic oil and gas supply and undermine Britain’s energy security. In addition, the North Sea’s infrastructure and skilled engineering workforce have a key role to play in Britain’s energy transition, for example via hydrogen. Undermining North Sea employers and supply chains would only hold back the green industries of the future.
Ministers are therefore to be commended for resisting pressure for a windfall tax that would have hurt the very investment we need to secure long-term energy independence.
Instead, we must pay for this crisis through the proceeds of economic growth – something Truss clearly acknowledges. Beyond the immediate measures to get through the winter energy price crisis, the policies announced by the government represent an extremely welcome pivot towards a growth program aimed at energy abundance. The target of making Britain a net exporter of energy by 2040 is ambitious enough and puts the country on the right path to better control of our domestic energy supply through renewables, natural gas and nuclear energy.
Specific measures such as the acceleration of projects in the North Sea, the end of the moratorium on splitting and recognition of the ongoing role of natural gas in the energy transition are reasonable and long overdue. In particular, producing more gas here will reduce our exposure to volatile global markets prone to manipulation by malicious geopolitical actors. We look forward to hearing more details on renewable energy investments, including onshore wind and solar. As noted by CPS Director Robert Colvile, onshore wind in particular has the potential to be both plentiful and popular with local communities.
It was also welcome to hear Truss say that she will end the short-term approach to energy supply and security, which in many ways is the root of our current situation. Nowhere is this better illustrated than in the now infamous 2010 clip of Nick Clegg pooping new nuclear power plants because they wouldn’t be commissioned until 2022. At the time, eight plants were under consideration. But only one (Hinckley C, now online in 2026) has been given the green light as part of the Coalition. Yet even now some politicians are happy to double down on the mistakes of the past 25 years, with Ed Davey saying the Liberal Democrats will run on a one-to-one basis anti-fracking platform in the next general election.
Fortunately, a more sensible policy now prevails. One of the main barriers to investing in energy infrastructure in this country is the planning system and the type of nimbyism on which the Lib Dems thrive. This is an area in need of fundamental reform, and the Truss administration appears to recognize this, with an energy regulatory review forming part of its announcement. Hopefully it won’t be just another kicking drill.
Other encouraging elements of the Truss government’s pro-growth energy program are also emerging. For example, municipal regulatory reforms, including around Solvency II, should help unlock the private sector capital we need to help fund the next generation of energy infrastructure – gas storage sites and nuclear power plants to grid upgrade and connection to decentralized solar power. wind farms and farms. But we should also seek to go further, for example by following in the footsteps of the EU in classifying natural gas as a green fuel in the current revision of the green taxonomy.
It would also be great to see reforms to the tax system to incentivize more investment, including capital deepening in energy generation, transmission and storage. New energy infrastructure should be permanently exempt from business tariffs, while full-load accounting – not only for plant and machinery, but also for buildings and structures – should be introduced across the energy sector. ‘energy.
As the current crisis clearly shows, cheap energy is intrinsic to the well-being and prosperity of individuals, families and the country as a whole. In the longer term, we must aim for energy abundance, by increasing renewable energy production, building more nuclear power plants and, at least for a few decades, using fossil fuels offset by carbon capture and storage. .
While the most immediate trigger for the winter energy crisis is Putin’s war in Ukraine, we are ultimately in a bad position due to more than two decades of bad policy that has deprioritized growth. Energy poverty is the result of political decisions. We can be pro-growth and choose abundance of energy instead. It’s still early days, but it looks like the choice Liz Truss made.
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