Liz Truss’ energy plan freezes bills – but leaves dysfunctional market intact

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The energy payment package announced by Prime Minister Liz Truss tackles an immediate problem: it avoids soaring household energy bills by capping them at around £2,500 per year until 2024 and proposes to keep prices low for businesses. Essentially, the government will cover a significant portion of your energy bill for two years by paying energy supply companies the difference between their wholesale costs (at which they buy energy wholesale) and consumer prices. capped.

By limiting bills rather than paying consumers directly, Truss hopes to temper inflation. The package is valued cost the government around £150bn. The question is whether this solves one of the problems plaguing the energy system itself (the answer: not really) and risks distracting attention from needed reforms.

Many have already noticed the irony of a small state curator Prime Minister embarking on one of the most important interventions of modern times. Absolutely, something had to be done, but two choices stand out.

One is to help all energy consumers, rather than targeting help to those who need it most. Rich and poor will share in government largesse (and the more energy you use, the more aid you get).

People in fuel poverty will remain by far the hardest hit with bills remaining at least double pre-crisis levels. Their share of energy expenditure will likely still be double that of wealthy households.

The other choice is how the plan will be paid. Truss ruled out new exceptional taxes (although reports suggest it won’t undo Rishi Sunak’s higher-rate three-year tax on oil and gas producers’ profits, which is expected to bring in around £5billion in the first year).

Profits reported by Shell and PB in the first six months of 2022 alone totaled around £30bn. In electricity, estimates of my own research group suggest that the increase in profits in the wholesale electricity market in 2022 must be at least £10 billion, probably much more.

If this is the backdrop for the new chancellor, Kwasi Kwarteng, declaring his intention to maintain “Fiscal disciplinewould mean gargantuan cuts to the public sector. Truss indicated instead that the package will be primarily funded by loan – increase in British debt and associated interest.

Fossil fuel fantasies

Truss also announced plans to allow new offshore oil and gas drilling (something the government had already encouraged with exemptions from 80% investment allowances in Sunak Exceptional Tax) and lift the moratorium on hydraulic fracturing. This will have virtually no impact on energy costs for UK consumers. The volume of new gas it could release over the next few years will be banaland unless Truss prevents the sale of production on the international market, this decision will not lower the price of oil or gas on the domestic market.

The apparent rush to open the country up to fracking, aside from the many hurdles, is apparently not outweighed by the loosening of the huge barriers placed in the way of land-based renewables (much cheaper and faster to deploy) .

Planning rules continue to stifle onshore wind development.
Dave Head/Shutterstock

Amid Truss’s rhetoric of encouraging investment through low taxes, big energy companies must be wondering what to do. If the whole world races to produce new fossil fuels, the price will crash in due course, ending their recent streak of record profits.

They also know that not only are future market prospects unstable, but climate change is getting worse. Government actions have the effect of loading energy producers with money while trying to steer them in one direction they know is unsustainable.

An electric opportunity

The package is a clean sheet when it comes to electricity. Truss’s recent intervention aside, electricity accounts for half of household energy bills and it is electricity, more than gas prices, that risks making some UK industries uncompetitive at scale world. In the UK and European markets, unlike many other countries, gas sets the price of electricityeven if the non-fossil sources represent more than half of the generation.



Read more: Renewable energy is cheaper than ever – so why are household energy bills only rising?


The reason is a pricing structure that is no longer fit for purpose. You would never guess from the current package that the most recent contracts for new renewable sources – including large volumes of offshore wind power – cost less than a quarter the wholesale price of electricity generation from fossil fuels. And they are by far the fastest growing contributors electricity production United Kingdom.

The structure of the electrical system itself is not durable. Gas, now the most expensive operating source needed to keep the lights on, sets the price of electricity across the wholesale electricity market, and this cannot continue because its role is further reduced. The obvious solution is to decouple non-fossil electricity from the gas-linked wholesale electricity price.

One option could be to create a channel for consumers to directly access renewable energy sources at their average cost. This “green power pool” could provide cheap electricity to three groups in particular. The two obvious priorities are the most vulnerable households and industries that need a lot of electricity, such as electric arc steel mills and many chemical plants.

A woman locks her car, which is plugged in and charging.
The UK electricity grid is changing and the market is not keeping up.
Husjur02/Shutterstock

But just as important for the future are consumers switching from gas and oil to flexible, carbon-free power, for transportation (owners of electric vehicles) and heating (people using heat pumps for heating and cooling). hot water instead of a gas boiler). Both make it possible to store energy (electricity or heat) so as to make more widespread use of the cheapest but variable energy sources, wind and solar.

The package aims to tackle the current crisis by betting on the future, both financially and environmentally. Liz Truss and the new government will have their work cut out to prove they have more sustainable solutions, before the future returns.

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