Who will solve the energy price spike?
A looming cost of living crisis will expose both Scottish & UK Governments as lacking serious policy proposals
THE ongoing brouhaha surrounding the antics of the civil servants, political staffers and politicians of SW1 has revealed a scandalous glimpse into our ruling class. The curtain has been momentarily drawn back, showing its hidden proclivities. But the truly shocking indictment is not party-gate, it is the total lack of dynamic energy to head off the looming cost of living crisis for the country’s poorest and most vulnerable.
February 7th will witness energy watchdog Ofgem decide on the new maximum price for energy firms. This is the energy price cap, which Labour’s Ed Miliband had initially proposed and the Conservatives had brandished Marxist (before promptly stealing it). The price cap sets the maximum amount a utility company can charge an average customer in the UK per year for the amount of electricity and gas they use. The logic being, it prevents suppliers simply passing wholesale price rises on to consumers. But one of the unintended consequences of having an energy price cap whilst still maintaining a privatised energy market is that it distorts.
You see, the cap simply dumps onto the shoulders of suppliers soaring wholesale costs. The result? A dozens of suppliers have collapsed, leaving thousands unemployed, millions of households scrambling to find a new supplier and an even smaller less competitive private market.
“More than two dozen energy suppliers have gone bust since the start of September, putting thousands of people out of work and leaving millions of homes in limbo as they wait for a new supplier”1
So despite the prevailing orthodoxy in government, the energy price cap creates plenty of problems as it attempts (and fails) to ensure affordable prices for consumers. After all, come February through April you can expect gas and electricity prices to rise to upwards of 50% once the cap is revaluated.
According to Emma Pinchbeck, head of trade body Energy UK
“We've had record-breaking gas prices since September, and over the last couple of weeks prices have spiked again," she said. "They are at levels that, frankly, we have not seen before.”
“It's looking pretty serious for the spring. Domestic energy bills are going to go up 45-50%.”2
An energy price cap that simply postpones the pain for households whilst rendering the market for energy less competitive is not a solution for households.
Furthermore, as a policy it can do precious little if anything about spiralling wholesale gas prices. Just look at how they rose last year in figure 1 below
What is needed are dynamic policy proposals to head off the looming cost of living crisis, and the current government in Westminster is still stuck boasting about an ineffective energy price cap policy they knocked off Labour years ago.
Unlike the Conservatives, Labour seems to have realised the cap isn’t sufficient and have proposed a new policy package to solve the squeeze on cost of living energy prices will cause.
The opposition party has called for the removal of VAT on domestic fuel, a £400 boost to cash benefits and loans to cover Supplier of Last Resort (SOLR) costs. This package, according to analysis conducted by the Blair Institute for Global Change, represents a pretty dynamic package.
We can see in figure 23 that the Labour proposals would actually go beyond simply mitigating the pain for low income households, it would leave them better off. At the same time, it wouldn’t be a boon for middle class and higher earners.
And so far we have heard nothing from either the Conservatives or the SNP about what their policy proposals are. Indeed the Conservatives are still boasting about the energy price cap and also occasionally throw in a touting of their Warm Homes Discount (WHD) policy. But the issue there is, whilst the government is increasing the WHD to those already receiving it, they have thus far refused to expand eligibility.
But the WHD itself is far from a perfect policy either, as the Blair Institute for Global Change points out
“an energy-supplier-administered scheme currently giving around 2.2 million low-income qualifying households £140 per year, funded by other households’ bills. WHD is currently received by a ‘core group’ of the poorest pensioners plus a broader group that can be allocated by suppliers according to criteria they set out. Each supplier has a certain number of discounts to allocate, so some households can miss out even if they meet the criteria. WHD’s coverage of the most exposed low-income households is currently both limited and very patchy, to say the least.”4
A policy where some who are eligible still miss out does not sound like the policy triumph the Conservatives are selling it as.
The Financial Times conducted analysis which shows that “UK homes face fresh energy pain with price cap set to hit £2,400 this year”5. So we urgently need to go beyond resting on the laurels of the price cap and a ‘very patchy’ WHD policy.
SNP obsessions with the politics of national identity and constitutionalism is an irrelevance and the Conservatives lack of imagination on policy will leave many exposed to real pain this year. So far only Labour has come up with serious policy suggestions, which could transform the political landscape as voters feel the pinch come May.
Theo Leggett, BBC Business Correspondent, 23rd December 2021, https://www.bbc.co.uk/news/business-59760331
Emma Pinchbeck, UK Energy, 23rd December 2021, https://www.bbc.co.uk/news/business-59760331
Overnight impact on household income in April with four policy packages, Blair Institute for Global Change, Analysis paper by Ian Mulheirn, James Browne, Christina Palmou, https://institute.global/policy/policy-options-ease-cost-living-crisis
Blair Institute for Global Change, Analysis paper by Ian Mulheirn, James Browne, Christina Palmou, https://institute.global/policy/policy-options-ease-cost-living-crisis
Financial Times, ‘ UK homes face fresh energy pain with price cap set to hit £2,400 this year, https://www.ft.com/content/d246f8b4-80ef-498f-b9f1-7779acc5efd7