The article below was written for the times by Ed Birkett, head of energy and climate at the Onward think tank, and John Penrose, Chair of the Conservative Policy Forum
Energy bills are shooting up, hurting everybody but hitting the least well-off hardest of all. And a bad situation will get even worse when the energy price cap rises again in October, delivering another blow to household bills.
The chancellor recently announced a huge cash injection to soften the blow. But there’s no magic money tree, and this latest £15 billion package came only four months after his previous £9 billion handout.
More fundamentally, Rishi Sunak can only offer short-term help: an aspirin to soothe the pain today, not a long-term cure that will stop it coming back tomorrow. But without that long-term cure we could be back here in a few months’ time. And again next year. And the year after that too.
So, while the government’s short-term fix is welcome, it’s not enough on its own. We need sustainable solutions. What would that involve?
To start with, we should modernise the energy price cap, rather than just rolling it over when it returns to parliament this year. It was originally introduced to kill off the “loyalty penalty”, where existing customers were ripped off by being charged far more than people who switched to cheaper fixed-price tariffs. It has done this, but only by forcing energy companies to sell energy to customers below cost, which has contributed to some going bust. The cost of failing energy companies is covered by customers, pushing bills even higher.
Fortunately, there’s a ready-made answer that’s working well in the insurance industry. There, it is illegal to charge loyal customers a different price from someone who switches.
In energy, the solution is a “relative price cap”, meaning that customers pay a similar price regardless of whether they have switched. But updating the price cap alone will not be enough. The real problem is the skyrocketing international wholesale price of gas.
Our gas and electricity bills follow the gas price, even though it has no impact on the costs of all the energy we generate from renewables. The cost of these has fallen massively, but it isn’t showing up on bills.
Any sustainable solution has to upend our wholesale energy supply, redesigning the market so it delivers energy that keeps our net zero promises, but more cheaply and reliably than today and no matter what’s happening in the international gas market.
What would that look like?
We would need to be more self-sufficient, using domestic production to uncouple us from the international wholesale gas price, which can be affected by Russia and other producers’ actions. And we will need a mix of technologies and fuels, based on the cheapest long-term contracts, so our bills are less likely to rise sharply.
The government also needs to stop trying to pick winning projects and technologies. Over the past 15 years successive governments have introduced a byzantine array of schemes to support different technologies. But, as Onward’s new report sets out, with almost all new projects getting some taxpayer-funded support it’s not hard to see why it’s created a boom for lobbyists, with all the costs ultimately being passed on to customers.
We should let energy firms find answers for our newly modernised wholesale electricity market so we can buy the best of whatever they’ve got, rather than politicians trying to pick winners. Last but not least, we must modernise the electricity grid so it can cope with more battery-powered cars and small, renewable electricity generators, and can discount supply for local consumers if there’s a surplus from Cornish solar farms in the middle of the day, for instance, or spare power from Scottish wind farms overnight. This could cut billions from annual energy bills.
If we’re looking for a sustainable long-term answer to give us hope alongside Sunak’s short-term help, this is where we should start.
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