There will be no new windfall taxes on energy firms to help fund the £100bn-plus household and business rescue package, the prime minister has said – a predictable answer given her past statements. But what about the obvious alternative: a cap on the price of electricity that is generated by firms whose costs are unaffected by soaring gas prices?
Not every nuclear, wind and solar project is currently making fat and unexpected profits, but many are thanks to an outdated system that ties their revenues to the marginal price of wholesale gas. A decoupling of gas and electricity prices is desperately needed – and the process can’t wait until the completion of the current leisurely official review.
Over in euro-land, they’re on the job. Draft proposals are being shuffled around Brussels to set a wholesale price cap for non-gas generators. An announcement is due on Friday, with the aim of redirecting excess revenues towards member states’ various support packages.
And we know the UK government has done its own emergency work, because last week’s chancellor, Nadhim Zahawi, said so. It would be a version of the idea kicked around by various academics, consultancies and even the industry: oblige renewables generators operating under old-style “renewables obligations certificates”, which are currently supremely lucrative because they pay a premium above the wholesale energy price, to switch to contracts-for-difference (CfDs). In the latter arrangement, windfall profits don’t arise: revenues above an agreed “strike” price flow, in effect, to public coffers.
Since conversations with the generators were being conducted by Kwasi Kwarteng – last week’s business secretary, this week’s chancellor – the new administration should be on top of the details. Yes, there are complications: generators will already have sold forward some power, so a semi-obligatory switch to CfDs may have to wait six months; and the terms of new 15-year CfDs would be crucial, since the government also needs to have an eye on long-term costs.
But the prize for government is obvious: once you start to bringing down prices in the electricity generation market, the cost of a price cap for households starts to become more affordable. There are various models for reform, but the important thing is to choose one. If that ingredient is missing from Thursday’s big energy announcement, something will have gone wrong.
Chancellor soothes nerves on Threadneedle Street
Kwarteng must be the first new chancellor this century who has felt the need at the outset to declare his full commitment to the independence of the Bank of England. With every other incumbent since Gordon Brown gave Threadneedle Street operational independence to set monetary policy in 1997, such backing has been taken as read. The question didn’t arise.
A public statement was advisable in Kwarteng’s case because Liz Truss’s campaigning rhetoric had set hares racing. Loose talk about reviewing the Bank’s mandate gave financial markets an extra reason to feel nervous about a new “pro-growth economic approach” that will initially involve inviting international investors to swallow new government IOUs by the bucketload.
The chancellor and the governor have agreed to reinstate weekly meetings, we’re told. Fair enough: the fiscal and monetary ends of the system need to understand each other’s thinking. But don’t expect markets to stop speculating about what “coordination” will mean in practice. Nor is it helpful to have the likes of Goldman Sachs’ economists speculating already about “potential personnel changes” at the Bank. Keep dialling down the tension.
Take Halfords’ warning with a pinch of salt
The cost of living crisis “represents a risk to road safety”, says Graham Stapleton, chief executive of Halfords, since the average age of cars on the road is getting older and owners may be inclined to scrimp on repairs.
Well, OK, that analysis probably contains a kernel of truth, but it is also an elaborate piece of promotion on Halfords’ part. From the company’s point of view, an ageing fleet of vehicles sounds like excellent news. While some punters may indeed defer repairs, the company’s own trading update showed that business in its garages is brisk: like-for-like revenues were up by 28% versus two years ago.
Indeed, Stapleton’s entire strategy for Halfords is based on the idea that servicing cars is a “needs-based” business and is thus more reliable than the cycling side, which tends to be either booming or slumping. As he well knows, most drivers still get their cars MOTed because the law requires them to do so.
