Yon her political career, Liz Truss has developed a reputation for u-turns. But even cynics were caught off guard by the new prime minister’s latest ideological shift. The avowed small-state libertarian has just unveiled a massive energy relief package that will see the government intervene in markets to cap household energy bills at £2,500 a year until 2024. Coupled with an additional six months’ relief for business and the public sector, the estimated cost of the intervention could reach up to £200bn.
With the household price cap due to rise by 80% on 1 October, massive intervention was needed. But not all large-scale interventions are created equally. The problem with this one is not the amount being spent, but where it is being targeted and how it will be financed. Basically, it is a massive handout to the companies that have profited from the energy crisis, leaving working people to foot the bill. To make matters worse, it incentivizes costly fossil fuel production, when only cheap renewables will help tackle the dual crisis of energy and climate.
To unpack the shortcomings of the plan, we need to start with a brief detour into the rather obscure way in which energy prices are determined. In the wholesale market, generators sell energy to suppliers that in turn sell it to households and businesses. The wholesale price is determined competitively, but the retail price is subject to a cap set by the Office of Gas and Electricity Markets (Ofgem).
The reason so many energy suppliers went bust in the early stages of this crisis is because Ofgem’s cap prevented them from passing on the spiraling cost of wholesale energy to retail customers. With the new plan, instead of letting suppliers take a loss whenever wholesale prices exceed the retail cap, the government will compensate them for the difference. No matter how high wholesale prices climb above the cap – and they could climb much higher given geopolitical uncertainty – the government will pick up the check.
Truss’s plan effectively means that the government will guarantee the income of the energy suppliers. The concern here is that the companies that dominate the sector don’t need this support, nor do they deserve it. As Joseph Baines, Miriam Brett and I show in research for the Common Wealth thinktank, energy suppliers have reaped sky-high profits, and the amount they pay in tax pales in comparison with the dividends they pay to shareholders, many of which are foreign governments. To subsidize their income on this scale without attaching strings, such as a dividend ban, is beyond reckless.
The new PM has ruled out financing the relief package with a windfall tax on the energy producers that have profited most from the energy crisis. And since Truss’s tax policies are expected to be highly regressivethis means that working people will end up bearing the cost.
Perhaps the most disappointing aspect of the package is that it does little to address the root cause of high energy prices. The government wants to double down on natural gas by lifting the fracking ban and ramping up offshore production in the North Sea. Not only does this mark a huge step backwards for the environment, it also makes no sense economically. The Climate Change Committee have already warned that tapping into dwindling domestic gas reserves will have a negligible impact on energy prices.
So how do we tackle high energy prices? By rapidly expanding investments in renewable energy. With prices falling sharply over the past decade, renewables are now nine times cheaper than gas. It is only by engaging in colossal efforts to build up wind and solar capacity that we can meaningfully address the dual crisis of energy and climate.
The government does have a plan for renewables: it wants to encourage private generators to switch to cheaper contracts that are not tied to the current wholesale energy price. In effect, this entails subsidising renewables generators so that they accept lower energy prices today in exchange for more stable revenue streams in the future. But these technical fixes will be voluntary and slow to take effect, and estimates suggest they will have at best a modest impact on energy bills.
Though subsidies for private renewables companies are welcome, what we really need is a public energy company, one that will directly produce and generate cheap and abundant renewable energy. The main advantage of a public alternative is that it would be better placed to circumvent the absurdities of private wholesale markets where energy prices are determined by the last, most expensive, unit of energy required to satisfy demand. Under the current system, the “marginal price” paid to a high-cost gas generator dictates the price of all energy, including cheaper renewables. Unlike private renewables companies, a public provider would face no pressure to accept the marginal price determined in private wholesale markets.
A public energy company would also avoid other costly and inefficient elements of the current system. First, it would sidestep expensive and messy measures to incentivize private renewables companies to increase their capacity. Second, it could ramp up investments by borrowing at government rates that are much lower than in private markets. And third, it would not feel beholden to pay out dividends, which funnel billions to shareholders.
Truss has shown that even the staunchest market ideologues can embrace big government. But there are better ways of intervening. Rather than throwing money at a broken private system, it is time to invest in a public energy company that can power the country not only more securely and efficiently, but more equitably and sustainably.