Gamble on energy bills support was risky but unavoidable

The government’s unprecedented intervention on energy bills was clearly necessary but also raises questions about whether future state handouts will now be unavoidable. As experts tell David Blackman, there is also concern about the lack of clarity on everything from costs, the impact on business customers and the knock-on effects on wider net-zero targets.

One senior energy analyst was on his way to the Channel Four News studios last Thursday (8 September) to be interviewed for that night’s bulletin about Liz Truss’ landmark energy costs support package, which the new prime minister had just unveiled in the House of Commons.

Midway through his journey, he was told that following Buckingham Palace’s announcement about the Queen’s health, his contribution would no longer be required.

Almost as soon as it was announced, this remarkable act of state intervention was eclipsed by perhaps the only news story that could have done so.

Once the official period of mourning for the Queen has finished though, political attention is bound to swing rapidly back to the energy costs crisis.

How did the package outlined by Truss measure up to the scale of the crisis? And will it meet the prime minister’s objective to end the UK’s “short-termist approach to energy security and supply once and for all”.

The centrepiece of the package was the government’s commitment to effectively freeze household energy bills at £2,500 for the next two years. On top of this Energy Price Guarantee, all households will receive £400 this winter through ex-chancellor of the exchequer Rishi Sunak’s previously announced Energy Bills Support Scheme with pensioners and people on benefits receiving another £650 on top.

The sheer scale and broad-brush nature of the government’s intervention is “broadly right”, says Josh Buckland, a former No 10 Downing Street adviser on energy and climate issues.

“It reflects the scale of the cost increases and gets support to customers immediately and effectively because it’s simple and universal. It doesn’t miss individual groups and classes of customers who could potentially miss out with something more nuanced,” he says.

Daniel Newport, former head of heat and buildings strategy at the Department for Business, Energy and Industrial Strategy (BEIS), agrees.

“The economic arguments for going big were pretty compelling. It was going to need to be, at least initially, a universal offer,” he says, while expressing surprise at the length of time that the government has committed to effectively hold down prices for customers

“It’s quite risky,” he says, noting that the open-ended nature of Truss’ commitment could fuel investors’ concerns about the UK government’s ability to balance its books.

The scale of support on offer could also fuel an expectation that the government will step in whenever energy bills spike, says Buckland: “You’ve set a precedent now that you’re willing to step in and take control of everyone’s energy bill, which is hard.”

While recent advances by the Ukrainian army has helped to reduce fears about relentless gas price increases, the volatile nature of this market begs questions what happens if they go up again, says Buckland: “The challenge is beyond this winter. If prices go up, the cost of the intervention will grow. Then there’s obviously a big question around whether you should cover the cost for customers over an elongated period of time.”

Lack of clarity on cost

The Resolution Foundation, in an analysis of the energy price cap announcement published this week, has estimated that the bail out for households could cost the Exchequer around £120 billion. However, the eventual figure could be half or double based on the spikes and troughs in the gas future market seen in August alone, the analysis noted.

Buckland expresses disappointment that the announcement contained no mention of how the support could be more tightly targeted once this winter’s immediate crisis has past

Such concerns will be amplified by the Resolution Foundation’s analysis, which shows that higher income earners will tend to benefit more than their counterparts from the government’s package. In addition, variations in household sizes and the energy efficiency of properties, means that the analysis estimates around four in ten customers will receive more in support than they would have paid out in extra energy bills.

While huge sums are being dished out, the many already struggling to pay their bills will still face acute challenges, says Buckland. “Two and a half grand a year is still a lot and it’s still two and a half times what the energy bill was a few months ago.”

The way forward, as he argued in a recently issued paper for the right of centre Policy Exchange, is some form of social tariff that ensures those on lowest incomes pay only what they can afford.

Ensuring that suppliers can target significant discounts at those who really need them is “not straightforward”, meaning any such reform could “probably” not be introduced until next winter, acknowledges Buckland, who is now a director at public affairs company Flint Global.

It will be tricky too to withdraw the support for businesses, which Truss promised would be “equivalent” to that on offer to households, Newport says: “That’s going to be a very, very expensive addition and something that’s going to be very difficult to move on from.

In this context, the government’s proposal to revisit the support on offer in the spring, when demand for power is falling, makes sense, he says: “You have to look at alternative means of providing support that are not quite so open ended. I just don’t see that it is credible to maintain a freeze across the whole of business unfortunately.”

Energy independence

Alongside writing a big blank cheque to households and businesses, Truss outlined a series of other steps to boost the UK’s energy security, including an immediate halt to the ban on fracking.

Taking a leaf out of her defeated Tory leadership rival’s book, she adopted Sunak’s campaign proposal for the UK to be energy independent, while bringing forward his date for achieving this goal from 2045 to 2040.

Dr David Joffe, head of carbon budgets at the Climate Change Committee (CCC), says the climate advisor’s existing scenarios suggest that energy independence by 2040 is “probably just about achievable”.

The scenario that most closely matches the energy independence goal is the CCC’s “tailwinds” pathway, which shows how emissions could be cut to net zero by 2042, eight years ahead of the government’s statutory 2050 target for eradicating emissions.

Under this kind of scenario, the UK could be producing about as much oil as it consumes, will still be a net importer of gas but potentially a net exporter of clean electricity by about 2040, he says: “That seems just about feasible.”

The tailwinds scenario relies on actions like strong energy efficiency and low carbon programmes, cars and vans being largely electrified by 2040 and greatly increased deployment of nuclear and renewable power, including the onshore solar farms that Truss spent so much of her Tory leadership campaign railing against.

Joffe says: “It would take an extremely ambitious programme across a bunch of sectors and even then, you can probably only just get to being energy independent.

“It’s basically pulling all of the levers to be able to get to being a net exporter by 2040.”

However it is “unrealistic” to expect fracking to get “anywhere close to filling the gap” in demand for gas by that date, while North Sea production is only likely to fall over the next two decades as its fossil fuel reserves are exhausted, he says: “The only way to get to energy independence is to cut our demand for fossil fuels even faster. That means radical pushes for decarbonisation but it needs to be strategic. This needs to be a strategic priority, not just for climate reasons, but also for energy security reasons.”

Energy independence is “absolutely” consistent with net zero, he adds: “It doesn’t need new fossil fuel production in order to achieve that because ultimately we can generate so much clean energy in this country that we could be a net exporter of electricity to a significant degree if we chose to take that path.”

Adam Bell, former head of energy strategy at BEIS, agrees that electrification is the only route to UK energy independence, including eliminating most internal combustion engine vehicles off the road by the end of the next decade.

He says: “You can only realistically do it through the massive expansion of offshore wind and the conversion of big chunks of the economy to running on electric vehicles.

“It would just be a very different and much more aggressive trajectory towards decarbonisation than you would otherwise.”

An important ally

The new 2040 energy independence goal puts more onus on the review of how to achieve net zero in a business and growth friendly way, which Truss has asked former energy minister Chris Skidmore to carry out.

Environmentalists have been heartened by the appointment of the Nottinghamshire MP, who led efforts during the Tory leadership campaign to ensure that candidates stuck to the 2050 net zero target.

Joffe says: “Obviously, Chris, is very much behind the zero agenda so it’s a welcome appointment.

“It (the review) will be largely based on existing understanding of what’s possible in terms of delivering net zero being tweaked or reframed rather than a wholesale change.

“He’s clearly not going to want to do anything that alters the overall trajectory,” says Bell, adding that Skidmore is likely to focus on the most economic way of achieving the goal, given the time available.

The review is unlikely to lead to an abandonment of the overall net-zero policy, he says: “It would certainly raise some questions around the stability of the regime if government chose to do that post hoc.”

Bell, who is now director of policy for consultancy Stonehaven, argues that the review is probably designed to provide political cover for the new secretary of state Jacob Rees-Mogg to justify to his colleagues on the net-zero sceptical wing of the Conservative Parliamentary party why the decarbonisation drive shouldn’t be abandoned.

Some of the more expensive policies, such as subsidies for more experimental technologies like tidal power, may be up for grabs though, he speculates.

Newport, who is now a senior fellow at the Tony Blair Institute for Global Change, is worried that the review will prove to be a more far reaching “reset” of the carbon reduction target.

He points out that the government must republish its Net Zero Strategy by March following a High Court ruling which stated that the current version of the document hadn’t taken sufficient account of aviation emissions.

Heat pump targets under scrutiny

He is doubtful that existing targets to increase heat pump deployment, which he admits look “little bit fanciful” against the current backdrop, will survive intact from Skidmore’s review.

Sunak offered a harbinger of a potentially more sceptical approach to low-carbon heating when he pledged during his failed leadership campaign to scrap the existing heat pump target.

“In the short term, the relentless focus on cost of living is going to mean producing more rather than expensive demand side measures”, Newport says.

The government’s existing target to make electricity generation zero carbon by eradicating residual fossil fuel generation by 2030, may also come under the spotlight amidst growing concerns about energy security, he says.

Added to that, he wonders whether the push to electrify large areas of the economy and the transport may be revisited in the light of increased worries, post-Ukraine invasion, about security of supply and blackouts.

“If we’re really worried about not being able to make it through winter without blackouts is adding unprecedented numbers of EVs onto the grid each year definitely a good idea?

However reining in these ambitions on low carbon heat and power will make existing targets in the carbon budgets, a set of markers that show how much emissions should reduce at five yearly intervals, “pretty impossible” to meet, he admits.

While the headline 2050 net zero goal is unlikely to be sacrificed following Truss’ campaign pledge to “double down” on the target, the profile of reductions set out in the carbon budgets may be less sacrosanct.

However in this and many other areas covered by the announcement, the government has yet to pin down key details.

Buckland says: “It’s a good sticking plaster for now but it’s not going to solve the underlying challenges.”

The challenges of achieving net zero at lowest cost and without compromising security of supply will be debated at Utility Week Forum on 8-9 November. Find out more here.