Today the new Prime Minister has announced the long-awaited support for rising energy bills.
A new Energy Price Guarantee is being introduced which supersedes the price cap and will fix average energy costs for households at £2,500 for 2 years. This is in addition to the £400 energy rebate previously announced, meaning the price will be just 6.5% higher than the current price cap level, rather than the 80% increase that consumers would have faced otherwise. A support fund is to be created for people using heating oil, those living in park homes (typically using LPG) and those on heat networks so they are also protected to an equivalent level. Green levies are to be temporarily “suspended”, by which the Prime Minister means they will be funded directly by the Government rather than through bills.
All businesses will also be supported at the same level for 6 months, as well as other non-domestic energy users including charities and public sector organisations such as schools, after which more targeted support will be offered to “vulnerable sectors”. The Business Secretary is to conduct a review of which sectors should be included within 3 months.
These benefits will also apply in Northern Ireland where there is no price cap.
The Government will provide energy suppliers with the difference between this guaranteed price level and the price cap set by Ofgem. These measures will not be funded through an additional windfall tax, but through the following methods:
Ramping up supply: a new Energy Supply Task Force has been created to negotiate new long-term supply contracts with both domestic and international energy producers
A new licencing round for the North Sea which is expected to issue more than 100 new licences is planned for October
Accelerating the deployment of green technologies such as hydrogen, solar, carbon capture and wind
Moving all renewable and nuclear projects to Contracts for Difference so they receive cost-reflective income and not income linked to the cost of gas
Creating, with the Bank of England, a £40 billion liquidity fund to support suppliers with wholesale price volatility and the resulting high margin calls
“Energy policy for the past decades has not focused enough on securing supply…there is no better example than nuclear where the UK has not built a single new nuclear reactor in more than 25 years. And it’s not just about supply, the regulatory structures have failed, exposing the problems of having a price cap applied to retail but not to the wholesale market. All of this has left us vulnerable to volatile global markets and malign actors in an increasingly geopolitical world. And that is why Putin is exploiting this situation by weaponising energy supplies as part of the illegal war in Ukraine,” – Liz Truss, Prime Minister of the United Kingdom of Great Britain & Northern Ireland
Longer term, the Government will set up two new reviews:
A review into energy market regulation to address issues of long-term energy security and affordability
A review to ensure that net zero 2050 is achieved in a pro-business and pro-growth way
In addition, the moratorium on shale gas is being lifted with immediate effect, which could see new gas flowing within 6 months if there is local support. Later this month, Great British Nuclear will be created with a view to ensuring that 25% of electricity demand is met through nuclear by 2050. The Government intends the UK to be a net energy exporter by 2040 and the Primie Minister has asked the Business Secretary to deliver a plan for this within 2 months.
Putting the energy trilemma at the heart of energy policy
Overall I am very pleased with this plan, as it contains many of the elements I was hoping to see. There is no mention of recovering the costs of this support through future energy bills, which I had been concerned about – indeed, the Government website only mentions suppliers being provided with the necessary funds to cover the difference. I am also pleased to see the suspension of green levies, although the statement did not outline for how long. The inclusion of consumers excluded from the price cap – those in Northern Ireland, people using heating oil, LPG and on heat networks – is greatly to be welcomed.
I would have liked to see the SOLR costs also being funded by the Government to restore a close link between cost and consumption since half of the SOLR costs are recovered through standing charges. I would also have liked to see an initial broad-brush approach being replaced with a more targeted approach after some initial period to avoid spending money subsidising the wealthy. I would appeal to those who can afford to pay more to donate some of this subsidy they will receive to energy charities to support people who are already struggling with current cost levels.
There is also equivalent support for businesses but for a much shorter period. This is also welcome – businesses do need support if we are to avoid wide-spread closures which would be highly damaging to the economy, and where businesses have high costs they tend to pass these on to their customers which would drive inflation and the cost of living crisis. But this measure will be hugely expensive, so limiting this broad-brush support to this winter, and then delivering more targeted support makes sense.
I support the plans to boost domestic oil and gas production, including the lifting of the moratorium on shale gas. I do question whether flowing gas within 6 months is realistic, and if so whether such flows would be meaningful.
A contact recently reached out to me suggesting that onshore conventional production could have more potential than fracking – we already have a limited amount of conventional onshore production for example at Wytch Farm in Dorset which has been operating since the 1980s and is licenced to continue producing oil until 2037. I encourage the Government to also consider this option. While increased domestic production will not reduce the global gas prices to which we are exposed, the increased income to the Treasury through taxes and royalites on this production will help fund this support scheme.
The plans to negotiate long-term supply contracts are encouraging, but it is important that these are firm contracts. We already have long-term gas supply agreements with Qatar, but since the Qataris have diversion rights, these do not guarantee gas deliveries to the UK. The new contracts need to be firm, with fixed prices, over a variety of tenors, and they should be negotiated with a range of buyers to diversify supplies and minimise risks. Of course, this depends on sellers being willing to enter into deals on this basis, and it may mean locking in a higher price, but this premuim should be viewed as the cost of both energy security and price certainty.
The commitment for more nuclear power is also very positive. Unlike the targets in the Energy Security Strategy, this is a firm commitment to meet a quarter of energy demand with nuclear by 2050 (although in its description of the new plans, the Government website still refers to “up to” 24 GW nuclear by 2050 – we need to stop with these non-targets and set clear minimum goals).
The other commitment – to becoming a net energy exporter by 2040 is very interesting. For most of the period between 1981 and 2004 the UK was a net exporter of energy due to its North Sea oil and gas production, but since the beginning of this centurydeclining domestic production saw an increasing need for imports.
It is very unlikely that the 2040 target will be achieved through hydrocarbon exports. It is more likely that as demand for oil and gas falls through the electrification of heating and transport, Britain will try to meet as much of its remaining hydrocarbon needs from domestic production, while exporting surplus wind power. This is a credible strategy but it will likely need more electricity network infrastructure to be delivered, both in terms of domestic transmission capacity, and cross-border interconnectors. It is also likely to need more energy storage to be deployed, possibly in the form of hydrogen, with excess wind generation being converted to hydrogen for later use (in fact, methane can also be made synthetically using surplus wind power, which could be an option if a hydrogen economy fails to emerge).
The big missing piece is on reducing heat losses from homes. This is an important price of the puzzle, which should not be ignored.
With its Energy Price Guarantee the Government is gambling that the cost of the scheme will both reduce the hardships faced by households, and avoid the collapse of many businesses. It should also avoid the costs which could have arisen should schools have been forced to reduce their hours of opening, requiring parents to either find childcare or cut back on work, while increasing the need for home energy use. Undoubtedly the costs of the scheme will be extremely high, but the costs of not acting would have been high as well. I can sympathise with an argument that Government borrowing to prevent the collapse of large numbers of businesses could be worth the cost.
I am encouraged by the renewed focus on energy security and affordability and hope this marks the start of a policy re-set, with the energy trilemma at its heart, delivering secure, affordable and sustainable energy while ensuring that we are much less vulnerable to external shocks. Time will tell…