Energy price crisis: What can the government do to protect the poorest households?
The energy price crisis has resulted in dozens of UK energy suppliers collapsing over the past four months, while Bulb has been placed on life support this winter – with the supplier being sustained by £1.7bn in public money after entering administration and leaving its 1.7m customers in the lurch.
Annual household bills are now expected to rise by as much as £700 in April, with the consumer price cap reportedly set to increase from £1,277 per year for average use to £2,000 – an eye-watering 57 per cent price hike.
Government meddling and patchy oversight from regulator Ofgem has created a ‘worst of all worlds’ situation for the energy market, where suppliers were not compelled to hedge responsibly to grapple with future market shocks while the inflexible price cap has prevented even responsible firms from passing on historic increases in wholesale gas prices to consumers.
The energy crisis is a global issue, caused by supply shortages, storage problems and rebounding consumer demand following multiple lockdowns in developed economies, with the consequences being felt worldwide.
However, the price cap has certainly contributed to domestic market carnage that could leave households on the hook for £3.2bn to reimburse suppliers rescuing stranded consumers from collapsed firms. Combined with Bulb’s bailout, this could add hundreds of pounds to household bills.
Alongside the costs of clearing up the mess, the mechanism has also prevented the market from being attractive and viable to external investment. Market liberalisation has broken the stranglehold of the Big Six, reducing its share of the market from 97 to 71 per cent, but it is hard to boost consumer choice and attract more money when regulations compels companies to make losses.
The UK government is currently weighing up what, if any, measures could mitigate a domestic crisis initiated by global supply shortages, storage issues, ensuing geopolitical tension, and a rebound in demand post-lockdown, with calls varying from windfall taxes on North Sea oil to cutting environmental levies completely, depending on the agenda of the politician.
City PM looks over some of Downing Street’s potential options to reduce the cost of energy bills for the UK’s poorest households.
1. MOST LIKELY: Increasing the Warm Homes Discount
The Warm Homes Discount scheme currently provides a £140 saving to 2.2m of the UK’s poorest households. The subsidy is typically paid by levies imposed on energy suppliers, but could be bolstered by further Treasury funds.
Goldman Sachs believes the discount could rise from £140 to £240 – following previous announcements of a further £10 saving – and that coverage will be expanded to 8.5m low-income households.
The investment bank said: “This is a well-targeted measure, as it is paid to low-income households which are most in need of assistance. In addition, the subsidy is temporary and only applies through March, reducing any issues of future removal of support. We think this is a likely option, and a somewhat larger increase in the scheme’s generosity is also possible.”
2. QUITE LIKELY: Loans to energy suppliers
During talks with Business Secretary Kwasi Kwarteng over Christmas, energy chiefs reportedly requested £20bn to help suppliers spread the cost of high prices over time.
The viability of such a loan depends on whether the wholesale price rise is temporary, or even for a normalisation of higher bills post-pandemic.
It could also set a precedent for subsidies to other businesses dependent on commodity prices.
Nevertheless, Goldman Sachs expects the government to step in to provide some further support to suppliers.
The investment bank said: “We think the government will step in with some support but this is more likely to be a few billions, rather than tens of billions.”
3. LESS LIKELY: Cut VAT on energy bills
VAT makes up about £61 of the average energy bill, and the measure is popular with pro-Brexit Conservative MPs, as it was not an option while the UK was a member of the EU.
Prime Minister Boris Johnson and Levelling-Up Secretary Michael Gove both wrote in support of cutting VAT in the run-up to the EU referendum in 2016.
Tory MPs and peers recently wrote a public letter to The Telegraph calling for the five per cent rate to be reduced to zero, as part of proposals to reduce annual household bills by £200.
However, The Institute for Fiscal Studies has highlighted that the measure is relatively small and is poorly targeted as plenty of wealthier households would also benefit from the cut levy.
The group also pointed to the difficulty of fiddling with VAT rates.
It said: “Abolishing VAT on domestic fuel would cost around £2.4bn per year, but on average would give households back less than a fifth of the annual rise in their energy costs.”
Johnson also seemed to dismiss this policy last week, noting it was “a bit of a blunt instrument”.
4. VERY UNLIKELY: Windfall tax on North Sea oil and gas
This populist measure has been pushed by Labour, with the opposition arguing a £200 household saving could be achieved with a £1.2bn one-off levy on the UK’s oil and gas sector.
It is both reminiscent of New Labour’s 1997 windfall tax on the profits of private utility companies, while also playing into progressive instincts about the environment, consequently unifying centrist dads with young left-wing activists.
Despite oil and gas companies rebounding strongly from the pandemic, the government is likely to be hesitant about meddling in the market following the chaos caused by the price cap.
Writing in The Spectator, Annabel Denham, director of communications at the Institute of Economic Affairs argued such a measure could also have long-term consequences for energy users.
She said: “They [windfall taxes] hurt consumers by stifling competition: while incumbents must put up with the tax regime, new entrants can divert their efforts elsewhere. And they risk a decline in investment, given few investors will put funds towards an industry that is subject to an unstable tax policy.”
Other measures have also been suggested such as cutting environmental levies to generally lower the cost of living, or potentially removing the increase in national insurance – however both policies seem highly unlikely.
It would be a big surprise if the government ripped up its environmental agenda months after hosting a global climate summit, while the chancellor, Rishi Sunak, has consistently explained that the pandemic splurge of has to be paid for and measures will likely remain focused on reducing pressure on the poorest households.