Rishi Sunak’s solution to the energy crisis is building on a legacy of failure
In response to a surge in energy prices the UK government has been forced to intervene. Five months after the Green Party of England and Wales produced its proposals, the government finally announced a package of measures. As an attempt to tackle surging fuel poverty they are bizarre, overly complicated and at best half measures. However, from reading them it becomes clear their real purpose is to fuel the ambition of the man who announced them, chancellor Rishi Sunak.
Global gas prices have driven a doubling. In the UK the increase in wholesale prices of electricity and gas have prompted a 54% rise in the energy price cap. This approximates to some £700 annually – around 2% of the medium household income, and 5% or more for the bottom 10% of earners. This is enough to generate a record rise in poverty without further government intervention. The Resolution Foundation predicted a tripling of households in fuel poverty.
What the government is doing
The UK government’s response to this crisis was initially to dither. The Greens made their policy proposal in October 2021, and most European countries had some response by early January 2022. The chancellor emerged in February 2022 with policies to be implemented from October. Delay does not seem to have enabled him to take the time to design a brilliant new approach. He has noticed that money needs to be given to mitigate the energy price rise and committed £9bn towards this goal – a sum comparable to other countries’ packages. However, rather than directly using the welfare and tax system as the Greens and Labour suggested, he has chosen to lend money to suppliers for a rebate on energy bills, to cut council tax and fund a small expansion in the winter fuel allowance.
These mechanisms overall probably deliver somewhere between £300-500 back to households, accounting for just over half the rise. This still leads to a doubling of fuel poverty according Resolution Foundation calculations, through the Institute of Fiscal Studies suggest that those right at the bottom end of the income scale will temporally be better off even as the average household takes a £400 hit. Nonetheless, these unorthodox mechanisms come with some odd effects.
The Council tax rise
The council tax cut goes to 80% of English households in lower council tax bands. Council tax banding is based on valuations of houses taken in 1991. According to the Institute for Fiscal Studies around 40% of residents getting this cut are in those earning in the upper half of the income distribution top half of the country. While around 11% of those in the bottom third live in the higher band houses and will not receive support.
This is worse, and these houses tend to be larger less energy efficient and take a higher-than-average hit from the price rise. Meaning that a select group of lower income households will be hit with higher energy bills and miss out the main support mechanism.
Moreover, as noted in the Guardian many tenants and students simply do not directly pay this tax meaning the benefit will accrue to their landlords, regardless of who pays the power bill.
The possibly significant political consequence kicked down the road is when this cut expires it will leave councils in the position of being responsible for a dramatic hike in bills for their residents as a rise kicks in and this cut comes off. It stores up a cost-of-living hike for the future.
Targeted support comes in the form of a small increase in the warm homes grant from £140 to £150 with an increase in recipients to 3 million. This is smaller than Labour proposed increase to 9 million households, and half the level of support proposed by both Labour and the Greens. Significantly Greens wanted to fund this with a tax on landlords and Labour with a windfall tax on big energy, similar to a measure proposed in Spain. Sunak has chosen to go with funding it with a surcharge on energy bills of about £5 per person.
The main measure adopted was the £200 rebate off energy bills for every household. This does address the problem in the short term, but again stores the problem up for future. The idea is that the full cost will be paid for by another surcharge on future bills – this time of £40.
Long term measures?
As Zoe Nicholson the Green Party’s spokesperson for a Green New Deal noted:
Instead of a simple and effective payment to everybody as we suggested, he has put forward a buy-now pay-later scheme which will create an additional burden for those on the lowest incomes further down the line.”
Indeed, these changes will lead to higher prices in the future than would otherwise be the case, as well as locking in a rise in poverty. This makes some sense if it is expected that prices will decline, but that is quite a bet as the West and Russia face off and climate change continues to disrupt supply chains.
What is most striking is the minimal attempt to address any of the causes of the price rise. China is liberalising its energy market and consolidating it into a national model rather fragmented provincial grids that inhibited renewable deployment. Norway and Sweden are transitioning away from gas to heat homes. Italy is suggesting putting £13.7bn towards energy efficiency measures.
With one of the most energy inefficient housing stocks in Europe this seems like a no-brainer for the UK. The Greens in 2019 suggested spending £25bn annually on energy efficiency for homes. Labour have belatedly come to a similar conclusion. Indeed, the Green-run Council in Brighton & Hove is already retrofitting properties.
Buried in Sunak’s announcement is a small expansion of much derided Energy Compony Obligation from £640m to £1bn over the next 4 years helping 305,000 households. By comparison the Committee on Climate Change estimates £250bn needs to be spent to retrofit 19 million households. This minor announcement unsurprisingly has not received much coverage. Also – as might be expected – it will be paid for by a surcharge on bills.
Other options could include market reforms as part of the costs passed on to consumers is from supplier failure. There is also reason to feel that the increasingly opaque oligopoly of the UK energy market may not be an efficient way to run things, allowing considerable profit leakage.
Building on a legacy of failure
The lack of a long term programme should not be surprising. Since they came to power, Conservative energy policy has been specialising in avoiding the long term consequences of their actions. Unfortunately, for the country they have remained in power for so long that their chickens are coming home to roast while they are still in charge of the farm.
In 2013, as part of a drive to “cut the Green crap”, the Conservatives and Liberal Democrats cut the spending on energy efficiency programmes, leading to a 94% fall in energy efficiency improvement. In 2015 the Conservatives used their new majority to end the carbon homes standard. Combined with moratoriums on onshore wind – the cheapest way to generate electricity in the UK – and an end to solar feed in tariffs, Carbon Brief calculates this contributed to increased costs of around £67 per household under the new cap. This is without factoring in decisions like the scrapping of the Swansea tidal barrage.
The government has made some progress on expanding generation, agreeing an expensive funding package for new nuclear, allowing construction of new onshore wind generation and more tidal back into the mix.
Meanwhile energy efficiency remains missing, as does long term storage. There are currently battery projects within the UK worth 20GWs competing for limited funding while there is efficiently no funding for longer duration storage, which could balance the grid when the wind does not blow.
Sunak is explicitly looking for a ‘short term fix’. The closest he has got to any long term approach is calling for more investment in the North Sea, as a way to resist pressure for a windfall tax on Shell and BPs massive profits.
Who benefits from putting off paying
This package is not only inadequate to the task, it very clearly raises energy bills for future both by not tackling the reasons prices are high, but also by directly paying for the package in tomorrow’s energy bills. It is hard to resist the impression that the reason Sunak is so irresponsibly paying extra to shift the cost onto tomorrow is that he does not expect to be responsible for his own mess in 12 months’ time.
Sunak avoids being seen as fiscally irresponsible, raising either taxes or substantially increasing benefits. His lack of action on climate issues plays to climate sceptic back benches.
This is a package of measures that seem designed as much as possible to avoid any bumps in the journey for the man responsible for it from moving to from Number 11 to Number 10 Downing street. Unfortunately, governing this way ensures a far less smooth path for rest of us.
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Image credit: Number 10 – Creative Commons