The government finally stepped in – to protect the profits of energy companies | Sandy Hager
In her political career, Liz Truss has earned a reputation for turning around. But even cynics have been caught off guard by the new prime minister’s latest ideological twist. The avowed libertarian from the small state has just unveiled a massive energy relief package which will see the government intervene in the markets to cap household energy bills at £2,500 a year until 2024. Coupled with further relief of six months for businesses and the public sector, the estimated cost of the intervention could reach up to £200 billion.
With the household price cap set to rise by 80% on October 1, massive intervention was needed. But not all large-scale interventions are created equal. The problem with this one is not how much is spent, but where it is targeted and how it will be funded. Basically, it’s massive aid to companies that have profited from the energy crisis, leaving workers to foot the bill. To make matters worse, it encourages the expensive production of fossil fuels, while only cheap renewables will help tackle the twin energy and climate crises.
To unpack the shortcomings of the plan, we must begin with a brief detour into the rather murky way in which energy prices are determined. On the wholesale market, producers sell energy to suppliers who, in turn, resell it to households and businesses. The wholesale price is determined competitively, but the retail price is subject to a cap set by the Office for Gas and Electricity Markets (Ofgem).
The reason so many energy suppliers went bankrupt at the start of this crisis is that Ofgem’s cap prevented them from passing on spiraling wholesale energy costs to retail customers. Under the new plan, instead of letting suppliers take a loss every time wholesale prices exceed the retail cap, the government will compensate them for the difference. No matter how much wholesale prices climb above the ceiling – and they could climb much higher given the geopolitical uncertainty – the government will cash the check.
Truss’ plan effectively means that the government will guarantee revenues for energy suppliers. The concern here is that the companies that dominate the industry don’t need this support, nor do they deserve it. As Joseph Baines, Miriam Brett and I show in research for the Common Wealth think tank, energy providers have made exorbitant profits, and the amount they pay in taxes pales in comparison to the dividends they pay to shareholders, many of whom are foreign governments. . Subsidizing their income on this scale without attaching any conditions, such as a ban on dividends, is beyond recklessness.
The new Prime Minister has ruled out financing the relief plan through an exceptional tax on the energy producers who have benefited the most from the energy crisis. And since Truss’ tax policies are expected to be highly regressive, that means workers will end up bearing the cost.
Perhaps the most disappointing aspect of the package is that it does little to tackle the root cause of high energy prices. The government wants to double down on natural gas by lifting the ban on hydraulic fracturing and increasing offshore production in the North Sea. Not only does this mark a huge step backwards for the environment, but it also doesn’t make sense economically. The climate change commission has already warned that tapping dwindling national gas reserves will have a negligible impact on energy prices.
So how do you fight high energy prices? By rapidly increasing investment in renewable energy. With the sharp drop in prices over the past decade, renewables are now nine times cheaper than petrol. Only by committing to colossal efforts to build wind and solar capacity can we respond meaningfully to the twin energy and climate crises.
The government has a plan for renewable energy: it wants to encourage private producers to switch to cheaper contracts that are not linked to the current wholesale price of energy. In effect, it involves subsidizing renewable energy producers to 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 a modest impact on energy bills at best.
While subsidies to private renewable energy companies are welcome, what we really need is a public energy company, which will produce and produce cheap and abundant renewable energy directly. 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 needed to meet demand. . In the current system, the “marginal price” paid to a high-cost gas generator dictates the price of all energy, including cheaper renewables. Unlike private renewable energy companies, a public supplier would not be pressured to accept the marginal price determined in the private wholesale markets.
A public energy company would also avoid other costly and inefficient elements of the current system. First, it would avoid costly and haphazard measures to induce private renewable energy companies to increase their capacity. Second, it could increase investment by borrowing at government rates well below those in private markets. And third, it wouldn’t feel obligated to pay out dividends, which funnel billions to shareholders.
Truss has shown that even the most fervent market ideologues can embrace big government. But there are better ways to intervene. Rather than throwing money at a failing private system, it’s time to invest in a public energy company that can power the country not only more safely and efficiently, but more equitably and sustainably.
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