Whatever you think of the various proposals to deal with the energy crisis, one fact stands out beyond all others. As a nation, we are worse off. Natural gas prices are eight times higher than they were at the beginning of 2021. Much of the increase occurred before Vladimir Putin invaded Ukraine. The end of lockdowns played an important role, with a sudden huge burst of pent-up demand. There’s also been insufficient investment worldwide to meet both our own, relatively stable, energy requirements and the rapidly rising needs of China – keen to wean itself off dirty coal - and other parts of fast-growing Asia.
How bad are things in the UK? Look at our trade balance in fuel. In the second quarter of 2019, a year before Covid made its mark, our fuel deficit was £3.5bn. In the second quarter of 2022, the fuel deficit had widened to a whopping £13.8bn, largely a reflection of surging import prices.
Yet we have been slow to recognise the full enormity of the challenge. One reason, I suspect, is the role of Ofgem’s energy price cap. The temptation is to think of it as a mechanism to protect households from the worst excesses of the wholesale market. In truth, it is nothing of the sort. The energy price cap was designed only to protect default tariff customers who were otherwise vulnerable to overcharging. As Ofgem stated in 2018, “energy suppliers charge their default tariff customers considerably more than customers who choose fixed-term contracts”. Today, however, there are no fixed-term contracts, because no energy company in its right mind will offer a price guarantee when wholesale prices continue to rise at a rate of knots.
In other words, the supposed “cap” is a misnomer. Prices will rise, cap or no cap. The boffins at Cornwall Insight reckon that a typical household – the cap “target” - will face an annualised energy bill of £3582 in the final quarter of this year, rising to £4266 in the first quarter of 2023. That’s a fourfold increase relative to what the typical household had faced in 2020 and the first half of 2021.
We’re back to our central fact. Yet knowing that, as a nation, we are worse off is not quite a plan of action. Any such plan must deal with three issues. First, who shoulders the burden? Second, are the proposals affordable? And, third, how might we adjust to a new energy reality?
Labour would hit the energy companies through a windfall tax that would contribute £8bn to a plan designed to freeze energy prices for all households at a total cost of £29bn, thus driving a wedge between what is now a much higher wholesale price and the price that we, as households, end up paying. Sounds attractive? Maybe, but unless energy prices fall significantly through 2023, all the plan does is delay the inevitable, at enormous cost. What might be just about affordable today could become a lot less affordable if wholesale prices stay where they are, let alone rise further.
Our would-be next prime ministers – Liz Truss and Rishi Sunak – have so far offered a lot less, at least when measured in billions of pounds. Truss wants to reverse the recent increase in national insurance contributions, but that would provide no help to those not in work (pensioners and those reliant on benefits, most obviously). Sunak proposes to cut VAT on fuel – another “wedge” in effect - and offer some targeted help for the poor.
None of these proposals, however, fully confronts what is now a global energy crisis. Indeed, Labour’s proposal could be regarded as an act of protectionism. After all, if household energy bills in the UK do not reflect the true cost of global energy, we will tend to “over consume”, leaving households elsewhere to “under consume”. Admittedly, others have already gone down this path but, as reported by Le Parisien newspaper, one of President Macron’s confidants is less than impressed: French people were “drinking champagne in an aeroplane, unaware that it is going to crash into a mountain”.
We do, however, have a clue as to what happens if energy prices remain high. Oil prices quadrupled in 1973 and doubled again in 1979. Eventually, our parents and grandparents – and our American cousins - adjusted, driving smaller, more fuel efficient, cars. But the journey was painful, in terms of both inflation and recession. Like them, we shall also need to adjust. Yes, there is absolutely a need to protect those least able to afford their energy bills. For the nation as a whole, however, such protection is both unaffordable and, longer-term, unwise. It’s time to get real.
