New PM faces bulging energy in-tray

There are no prizes to guess what will be top of the new prime minister’s in-tray when he, or more likely she, enters No 10 Downing Street on 5 September.

“The three things that are going to be in it are cost of living, cost of living, cost of living and cost of living: end of,” says former Labour MP Mike Foster, riffing on his former party leader Sir Tony Blair’s famous quote about education.

Malcolm Grimston, senior research fellow at the University of London’s Imperial College, hasn’t seen “any sign that there’s a real understanding of the tsunami that’s going to hit us” during the Conservative leadership debate.

The former Tory councillor hopes that if Truss takes over as PM from Boris Johnson, she won’t be trapped by her campaign rhetoric on tax cuts.

“Tax cuts don’t help the most needy, certainly not much. We need to be targeting the resources very firmly on those who need it,” he says.

Foster, who is now chief executive of the Energy and Utilities Alliance, expects to see a volte-face by frontrunner Liz Truss, who dismissed what she termed as “handouts” during the campaign.

“The writing is on the wall largely for what’s going have to happen on energy bills,” he says.

“It seems to me unfathomable that you won’t end up in a world where bill payer support is roughly doubled for vulnerable households at least.

“I hope that it’s a day one thing, if not minus ten day thing for the new leader.”

The new PM won’t survive for long if they fail to tackle the bills crisis, even if that may involve nabbing proposals by opposition parties, Foster says: “If the new prime minister does not deal with energy bills as both direct and indirect causes of the cost of living crisis to the satisfaction of the vast majority of the public, he or she will probably be out within 12 months.

“Once you get to 1 October when the new price cap kicks in, if nothing has been done that’s bold enough to capture the public attention, he or she’s finished, it’s as simple as that.

“If I am wrong, all bets are off of what that means for the for the political system.”

The case for helping with energy bills, including non-domestic customers, is also a no-brainer in macro-economic terms argues Kathryn Porter, energy consultant at Watt-Logic.

“The economic cost of not acting is going to be large numbers of bankruptcies across many sectors.

“Small businesses are going to need support, possibly almost at the same level as the domestic market. We really don’t want to see large numbers of small businesses failing because that’s bad for the economy overall.

“You’ve got to think in the long term. Our debt levels are not the highest in the G7 so we can borrow more and to get through this period we probably need to.”

In addition, the costs of bill bail outs must be seen in the context of the Ukraine crisis, which has fuelled increases in gas costs, she says: “We might not be firing actual bullets at people but we’re certainly in an economic war and you can make an argument that we’re fighting a proxy war in Ukraine against Russia.”

The “extraordinary” nature of the cost increases feeding through into energy bills means the government must step in, says Foster: “Governments are there for these types of events, where individuals don’t have the ability to deal with an issue that’s way beyond their control. In the same way, governments looked at the public policy challenge of Covid and brought in furlough.

“For the vast majority of people, seeing an energy bill go from what was 1200 quid a year ago to what looks like being in excess of £3000 is just unaffordable and there’s no sign of it coming down quickly in the future.”

Truss’ campaign appears to be taking on board such messages with signals that her government would offer additional help to cushion bill payers from the looming increases in energy bills.

Energy UK, in a letter to the chancellor of the exchequer Nadhim Zadawi, has urged him to immediately commit to extending the £400 support for all customers through the Energy Bills Support Scheme, which was announced by his predecessor Rishi Sunak in May.

Administratively, the “easiest thing” for Truss to do is to “just change the numbers in Rishi’s package”, says Daniel Newport, head of net zero at the Tony Blair Institute for Global Change.

Porter advocates a combination of cutting VAT on energy bills and transferring green levies into general taxation, which would save the typical customer £400 per annum.

To provide additional help to those on low incomes, she backs a social tariff with shortfalls on wholesale costs funded through increased government borrowing.

Consultancy Auxilione’s forecast that the retail price cap will stay above £5,000 for the whole of next year signals that the government needs to be thinking about its response beyond this winter, says Newport: “We all know that the energy crisis doesn’t end on 1 April next year. What we need now is the outline at least of a longer-term intervention.

“The implication of the May package was that there are about a third of households that really can’t afford to spend a penny more than £1500 a year on their energy bills. That’s not changed and won’t change unless we radically reform our economy.

“You’re probably still going to have to give some element of support, at least to poor and vulnerable households, that quite frankly, could last for decade.”

A longer-term response, which would mean the government “stopped sort of lurching from emergency budget to emergency budget” would be “refreshing”, Newport says.

The industry has coalesced around support for a deficit support package, which uses government-backed loans to stabilise bills by smoothing out spiralling wholesale gas costs.

On top of spiralling bills, recent weeks have seen concerns grow about whether the UK has sufficient energy supplies to get through the winter.

Consumers shouldn’t worry about availability of gas for home heating, says Foster: “People should not be frightened there’s not going to be the gas available to keep their homes warm. We need to dispel any sort of concerns on that front.”

But the picture is less clear cut on whether there will be sufficient gas supplies to meet electricity generation needs, he says.

The National Grid Electricity System Operator (ESO) has just announced that it is running an extended drill to test whether the electricity network will be able to cope this winter.

Business and energy secretary Kwasi Kwarteng may have played down concerns that the UK will need to ration energy this winter, but the government should be “honest” about risks of potential under-supply, says Porter: “BEIS (Business, Energy and Industrial Strategy) and National Grid need to be more on the front foot about this and more public.”

Pointing to recent sustained lulls in wind generation over the summer, she says: “If you get that situation in the winter, when demand is higher, then obviously things could become very tight.

“If we had weather patterns such as we’ve been having this summer in the winter, then it would be very difficult because you’re trying to manage this low wind and high demand over many days.”

And policy makers’ assumption that the UK can rely during these periods on imported electricity via interconnectors is looking on shakier ground following recent events, including recent outages in the French nuclear fleet and low hydro-electric output in Norway, Porter says: “If Britain and Germany experience low wind at the same time, things will get really stressed because we’re going to be competing with each other for imports from other countries like the Netherlands and Belgium.

“There’s been an assumption that it will always be windy somewhere but the last couple of years has shown us that that’s actually not true.”

The risk of blackouts increases the case for bringing forward measures that would have probably been unthinkable for the UK government last year when it was preparing to host the global COP 26 climate change summit.

The UK’s rump of coal-fired generation plants has already been given a fresh lease of life.

As a further stopgap measure, emission regulations should be suspended this winter for industrial backup generation so that it is easier to bring forward diesel plant, says Porter: “Lifting those emissions limits provides another alternative to using gas and electricity directly from the grid, which could be very helpful.”

This step could also dampen some of the cost prices currently helping to stoke inflation, she says: “Lifting emission regulations for backup generation will reduce the cost of energy because then they can switch to (cheaper) diesel instead. That will mean that those companies don’t need to start increasing the cost of their products and services to their customers, which is obviously inflationary.”

It may also be “sensible” to pause the offshore wind programme, but before doing so the government should ramp up its energy efficiency efforts, Porter says. “We have an extremely leaky housing stock. It’s really about time that we just bit the bullet on that and put in place a proper programme of reducing heat losses in homes. We shouldn’t stop putting it off because it’s difficult and complicated.”

Darren Jones, chair of the BEIS select committee, agrees on the need to act on energy efficiency.

“Everybody has been shouting about energy efficiency while smacking their head against the wall. They (the government) have to come up with an answer, they just can’t keep ignoring it.”

This is one of the areas where whoever takes on the energy portfolio in the next Cabinet can’t afford to “waste any time”, he says.

Pointing to the plethora of energy visions and plans that have emerged from the government over the past year, the answer isn’t more policy, says Jones: “There’s been lots of policies, but not much focus on delivery.”

Current high levels of gas prices could last for up to three years, depending on when new projects are brought forward to displace Russian output, says Porter: “We’re facing an economic crisis. We have good reasons to believe that the drivers of this are time limited. The question is how we get through this period causing the lowest damage to the economy.”

This can best be achieved by limiting energy cost increases, which otherwise would stoke wage increases, she says: “What you don’t want to do is embed those inflationary effects into the economy too strongly. If you allow wages to increase, then obviously that is really difficult to claw that back.”