Our initial response to the government energy announcement

We welcome the government’s objective to address the affordability of energy for both domestic and business consumers in the UK. The policy announcements made today will alleviate some of the hardship consumers have been concerned about for many months.  

On the household side of the equation, industry thinking is well progressed, and this is alongside the comparatively simple tariff structure. This should mean progress on implementing the ‘energy price guarantee’ of £2,500 for a typical household’s energy costs can move fast. Not loading recovery of costs onto bills is a positive move too.

But while the freeze is lower than Ofgem’s announced October price cap rise, typical costs will still be double the energy prices domestic consumers were paying only a year ago. Many families will still be facing a difficult winter. It is vital that the campaign to support energy efficiency is well structured and delivered quickly. Every fast and credible lever for attacking this problem from an energy usage side needs to be pulled.

Delivering an equivalent energy price guarantee to all businesses for six months, before targeting specific sectors, is likely to be more complex. The approach will invite pressure on where lines are drawn as we move from general support to sector-based approaches. The challenge is also financially steeper in business than households. UK businesses contribute a large share of demand, and face significant hikes in their energy bills. There are a variety of tariffs and different types of price fixes and hedging in play as well. Implementation of support here without creating accidental winners and losers across companies, sectors and suppliers is doable but challenging. To prevent widespread business distress, particularly during the first 6 months of cross-economy support, the injection of money required could be much higher than currently assumed. The two commodities in shorter supply than gas right now, from businesses struggling with energy bills, are time and cash. Neither will wait for long periods of policy development and implementation to conclude, with businesses already making hard decisions to close or release workers 1  

Looking further ahead, the stakes in this crisis have always been huge, with continued support for the change required to our energy market to accompany net zero an absolute priority, as is minimising the time the UK economy is now harnessing to gas prices. The relief following the shot in the arm today’s policy package delivers, comes with its own risks. We should not kid ourselves that today’s medicine is the cure of what ails this market. With so much at stake, it is absolutely vital we put this sector on the path back to sustainable and enduring health.

We have argued vocally since last Autumn about the need to think long-term. Going into this crisis a year ago, we suggested that we needed to develop policies which recognised cross economy effects, and impacts on businesses. And our longstanding view is that we need to calmly look at reforming the wholesale markets without jettisoning useful incentives or damaging investment signals, that we needed to migrate away from tariff caps towards social tariffs, and that we need to address the gap in policy on energy efficiency.

Our view on where focus should be does not change today, but what does is that a large measure of the economic cost of the current crisis is now being taken on by the government at a level that remains unclear. As a result, the incentives to act in all these areas, so the exposure to risks and costs can be limited, should be overwhelming for Prime Minister Truss, and the full force of the government machine being put behind progress on these longer-term reforms should be a national economic priority. What this funding has done is bought us time, which needs to be used wisely. It is only week one, but it is already apt to say that the legacy of this new government depends on it.

Reference:

  1. Weathering the storm: Mitigating the impact of energy price hikes for businesses – Cornwall Insight paper

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