There’s a lot we don’t know about the government’s new plans to help people with their electricity bills.
We don’t know how much they will cost. We do not have a clear understanding of how they will be funded and paid for. We don’t know exactly how this scheme will work in Northern Ireland, or for that matter the specific costs that gas and electricity should be capped at.
But here are a few things we do know.
First, it would be a major fiscal intervention—perhaps the single most expensive tax or spending policy in peacetime history.
Second, while this is certainly a large and unconventional step, it is no different from the interventions we see in much of Europe. We are all in the same boat, or rather similar boats in a stormy sea.
Simply put, now that we can no longer rely on Russian gas supplies, Europe now has a lot less energy. This pushes prices to levels that will collapse all our economies and send millions of households into real poverty. This is not an exaggeration: this is the logic of the energy market, which is very important for all our lives and whose prices are now many times higher than the previous prices.
The fact that the government has not presented us with any costs is disappointing and frankly unnecessary.
Yes, it was put together very quickly, but the Treasury still managed to provide some guidance on the potential cost of the holiday scheme, even though it was hastily put together outside the regular budget. However, the key feature – in some ways the defining feature – of this policy is that we simply do not know how much it will cost.
The government has told us it will cap average household bills at a typical level of £2,500 a year. By the way, note that this does not mean that you will no longer pay over a certain amount; it just means that it will limit the average cost per unit of energy that utilities can charge us. The government simply prefers to name these costs in terms of what it would mean for a “typical” household and their “typical” use.
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There is, of course, no such thing as a “typical” household. Your final bill may be more or less than £2,500. And – this is very important – if you use more gas or electricity, you still have to pay a lot for it. Your accounts are not limited; the cost of each kilowatt-hour is limited.
A lot can happen in two years
And because we don’t know where the market price of energy will go in the coming months, and because the final cost of the cap depends on the “wedge” between what the market thinks you should pay for energy and what the government thinks you should pay, it’s hard to know exactly how much it will cost.
Indeed, it’s hard to think of another government policy that has this much potential to raise costs — especially since Liz Truss has committed to keeping the guarantee, as she’s framing it, for a full two years. A lot can (and likely will) happen during that time.
But since the government refuses, let’s pick up the cost ourselves, shall we?
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What we do know is that bills are due to rise to (again the average ‘typical’ household level) £3,549 in October. Let’s imagine that the price determined by the market is to remain for the next two years. It would cost the government around £30 billion a year to make up the difference between the two figures. That’s about the same amount we spend every year running the UK armed forces.
The largest fiscal intervention in peacetime
But the problem with this illustration is that prices have risen dramatically since Ofgem last looked at the figures. Wholesale prices now look set to rise to the equivalent of £5,000 per household by next summer, according to the agency Cornwall Insight, which follows it closely. If this actually happens, it will mean the cost of the policy will be much, much more: potentially £70 billion a year. This would be more than the annual cost of the holiday scheme, making it the largest ever peacetime financial intervention. Over two years, this means the government could easily spend more than £100 billion just on supporting households.
And note that this is just the beginning as Ms Truss has also announced a support scheme for businesses and schools. It will only last six months, although it can be expected to be extended if prices remain high next year. Again, no cost has been disclosed, but it will almost certainly cost tens of billions.
Truss said nothing about the need for households to save energy
A few other points are worth considering.
Firstly, the various support schemes introduced by the previous government will remain in place, including £400 off your bill for all families and continued support for pensioners, people with disabilities and those on income-related benefits. This means that while in some ways this latest measure is ‘flat’ and benefits well-off families as much as less well-off, these previous schemes will help skew support somewhat towards needier families. However, this is far from a measure of redistribution: it is as crude as you can get.
Second, the Prime Minister talked a bit about the changes she plans to make to the wider energy market: fracking, more contracts for difference between energy companies (meaning they fixed electricity rates rather than taking the market rate) and more nuclear power plants. While that’s all very well, it’s unlikely to make much of a difference anytime soon.
There was nothing about the fact that households should try as much as possible to save energy and reduce when possible. It seems strange, given that limiting electricity is one of the obvious ways to respond to Russia’s energy weaponry, that UK politicians remain too nervous to even mention it.
Energy rationing is already happening
However: energy rationing is already happening, even if it’s not called that. Businesses across the country are already being forced to cut back on work and reduce production simply because it doesn’t make economic sense to keep paying for electricity.
The depressing reality is that many households across the country are facing similar difficulties – but this time it’s not their income levels that are at stake, but their heating and well-being. This government support may prevent poverty for millions of families (which is what we really wanted), but everyone’s bills in the coming months will be much more expensive than we have experienced in a long time.