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 century declining 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…
Absolutely right to point out, as many others have, that today’s announcement omitted any consideration of the role that demand management should be playing, but isn’t. I commend again your August 19 blog entitled ‘ reduce energy waste to tackle e energy security and affordability.”
Nice summary, thanks. How far do you think the semi-forcible moving of all renewables and nuclear onto Contracts for Difference will reduce the underlying price of electricity and is it clear what the mechanism for benefiting from this will be? It seems quite a long way short of proposals like yours and Michael Liebrich’s for split pricing.
I think it will make a difference becuase it effectively takes these contracts out of the market altogether. I would have liked to see a windfall tax since that would have been a quick way to claw back some of the excess profits already earned. This mechanism will reduce market liquidity and that is something the REMA process should address.
We have to be realistic, this new Government was never going to be able to deliver a perfect free market solution, politics simply would not allow it.
As such this was a hugely reassuring statement of support and intent.
It was reassuring to read your analysis and thoughts.
I’m intrigued to see more details on the changes to the CFD regime, it’s pretty monumental, particularly if this brings all renewable generators onto the scheme – which is my reading. There is also the thinking, which I agreed with, that it was the intention of the renewable generators who had low options never to take them up, if that was the case then they will doubtless be not best pleased.
Javier Blas’ interpretation is that conversion to CFD will be via negotiation
Why would you want to give up your ROC price for a CfD voluntarily when you can sell on difference at higher price? What am i missing?
The problem is all we know is what was in Truss’s statement so we have no idea how government intends to deliver.
There are options for government to force the issue though, and IMO government should be hard on the variable generators.
The first option is to set the RO to zero, government sets this each year and it appears to be completely discretionary.
The second option are windfall taxes, Truss has ruled these out but my take on this is that the intent is not to further tax gas/oil, I suspect they’d be happy to use it as leverage here.
Just read this article in the Telegraph from a few days ago:
The Telegraph: Fracking ban lifted as Truss says shale gas could flow in six months.
A new taskforce, led by former vaccine taskforce director general Madelaine McTernan, will seek to negotiate long-term contracts with renewable electricity generators that will cap their earnings, helping to bring down household bills.
Following meetings with officials, renewable energy producers have agreed in principle to accept new long-term contracts at fixed prices well below current rates, according to the BBC.
So Javier was sort of correct, though it would appear the basis for new contracts has already been established. I suspect the government would have been in quite a strong position on this.
I think they will be forced to do it under the threat of windfall taxes and exclusion from future CfD rounds. Ultimately the Government can pass legislation to compel the change, so while it might be technically voluntary, in reality I think it will be more or less mandatory and the question will be how much trouble they want to make about it. These contracts are far more genereous than was ever intended, and these generators have been earning vastly inflated income at the public’s expense.
V good summary Kathryn (as always). Still would have preferred more HMG focus on ‘voluntary/good’ demand destruction and concerned that, depending on weather etc, in ‘peak winter’ we will get no energy from Europe (gas or electricity) and so may end up with ‘compulsory/bad ‘ demand destruction of, effectively enforced, closure of energy-intensive companies/industries.
There’s nothing in the announcement and subsequent information that precludes that kind of action. My expectation is that if we experience system stress / expected system stress, we will see public appeals for demand reduction and/or load shifting. But the Government needs to also be conscious of not harming vulnerable consumers, so the messaging around this needs to be careful.
You state: “The big missing piece is on reducing heat losses from homes. This is an important price of the puzzle, which should not be ignored.”
You could go much further: avoiding waste of energy in all buildings and in transport is neglected in the UK. During the recent heatwave, local shops had their doors permanently open (“to provide some air”) and yet the air conditioning systems were operating at full blast – a practice recently banned in France. Driving at 55mph instead of the usual 80mph on motorways can markedly reduce both fuel usage and tyre wear – important because microplastics and rubbers from tyres are a key part of ocean pollution. The UK government has set its face firmly against encouraging people to consume less and behave more responsibly.
Returning to the energy savings from insulating houses – savings may be less than expected because (often involuntarily) wintertime room temperatures increase after insulation. The amount of energy consumed may stay much the same, but occupants benefit from a more comfortable home. This can include enjoyment of inside temperatures as high as 24 or 25C and the abandonment of previous habits such as wearing winter clothing in wintertime.
In the USA, wanton waste of energy is endemic. During sweltering days in Chicago (for example) it is not unusual to find the indoor air temperature in air-conditioned buildings to be so low that extra layers of clothing are required.