Utility Week

UTILITY WEEK | FEBRUARY 2022 | 13 Regulation that would enable suppliers to smooth out the cost of the recent price spike in whole- sale gas prices into future years' bills. Ofgem has already launched a move to allow the costs of failed suppliers, which have entered the Supplier of Last Resort process, to be smoothed out over several years instead of the hit being absorbed immediately. A loan scheme is a "promising avenue", says Buckland: "It doesn't rely on a huge amount of government expenditure now, on the basis that the cash can be recovered and would allow slightly more signi- cant sup- port for customers in April." Bell worries about the risk, if this scheme went ahead, that new entrants to the market would be able to undercut existing suppliers because they would be unburdened by these additional loan costs. However, Foster reckons the government will want to see its intervention go straight into customers' pockets, like additional Warm Homes Discount payments, so that ministers can take the credit. Levies Since gas prices began to rocket in the late summer, the cry from climate change action sceptics has been to strip from bills the environmental levies, which have been added to stimulate the growth of renewable generation. The current price spike has proved a "boon" to this campaign by the recently established Net Zero Scrutiny Group of mainly Conservative backbench MPs and peers, says Bell: "They will get some traction and may push back certain policies." An important chunk of these policy costs and levies is though the cash it raises for the improvements funded through the Energy Company Obligation scheme, which is tar- geted at the kind of fuel-poor customers who will be feeling the pinch most acutely come April. "Removing that from bills would be just stupid. I hope government wouldn't be so stupid," says Bell, who is now head of policy at consultancy Stonehaven. Foster agrees. "It's the worst possible con- clusion anyone could come up with when people are worrying about heating bills: to scrap a mechanism that delivers energy e' - ciency programmes to the homes of those who can least a' ord it." Savings on the stripped out levies would still be dwarfed by the chunk of the bill from increased wholesale gas costs," says Buck- land: "It doesn't negate the increase and is a fairly small portion. It's not as easy as lop- ping 25% o' the bill." But while a wholesale stripping out of policy costs and levies is unlikely to hap- pen, the current crisis could provide added impetus for pushing the legacy costs of early renewable support schemes o' bills, says Bell: "You might see some of the thinking going into that being used to remove remain- ing costs of the Renewables Obligation [RO] and Feed-in Tari' s [FITs] o' the bill and on to general taxation." RO contracts, which make up a he™ y slice of the levies, only have six years le™ to run, he adds. In addition, the £6 billion cost of the remaining RO contracts is - xed and can therefore be quanti- ed by the Treasury, says Dr Jonathan Marshall, senior economist at the Resolution Foundation. While there is a "very strong ethical argu- ment" for shi™ ing renewables subsidies from bills to taxation, the risk is they will end up - ghting with more politically high-pro- le causes like the NHS, says Foster: "You are competing against all the other policy costs across all government expenditure." VAT The centrepiece of Labour's response to the energy costs crisis has been a proposal for a temporary cut to the VAT rate on energy bills. So far, the government has brushed o' the suggestion, with Boris Johnson describ- ing it as a "blunt instrument" even though the prime minister campaigned to cut VAT on energy during the Brexit referendum. Marshall agrees. "It's not enough and it won't make a di' erence." A VAT cut on its own won't address the problems facing cash-strapped customers but could be a useful element of a wider package, says Energy UK's Markall: "For a time-limited period, it should chip away at that price rise." And weighing on the Treasury's mind will be concern that should spiralling energy bills force small - rms out of business, the tax take could end up being reduced anyway. The Treasury will have to weigh up this "trade o' ", says Bell: "The actual impact on - nances is not as pronounced so we might see more movement." While acknowledging that the VAT isn't a "perfect policy", Foster says lower income households will bene- t more than others because a bigger share of their income goes on paying bills. And he adds that EUA polling, which showed that 83% of voters in Red Wall constituencies back a temporary VAT cut on energy, shows that it would be "very popular". Weighing up the options Before the current crisis broke, BEIS was in the middle of an A' ordability and Fairness review to help map out how the costs of the transition to net zero can be distributed. Among the thorny issues that this exer- cise, which was due to be published in the early part of this year, was meant to address was how to shi™ renewable energy subsidies and other policy costs from electricity to gas. While the scale of the current crisis can only reinforce the case for the review, it is unsurprising that the exercise appears to have gone on the back burner. Buckland says: "It's happened very sud- denly so there's an immediate need to react rather than worry about the future structure of the market. "The political pressure is increasing: the real challenge is whether they can pull some- thing out of the bag in the next couple of weeks." The government will show its hand a™ er the price cap announcement, says Foster: "They will make a big play of being seen to respond." However, any intervention will fail politi- cally unless it matches the scale of April's bill increase, says Buckland. Foster, who used to be a Labour MP, agrees: "It's an incredibly tough call, they [the government] are damned if they do, damned if they don't and if they go half-way." The "febrile atmosphere" in Parliament will also have a bearing on the government's response, he says: "There's lot of uncertainty at Westminster therefore a lot of uncertainty about how to respond." If the beleaguered PM looks vulnerable to an imminent leadership challenge, the chan- cellor may be tempted to woo fellow Tory MPs by sanctioning a VAT cut, Foster says: "The Treasury might be very generous." One thing is certain, however, the scale of the crisis warrants a wide-ranging pack- age, says Markall: "It will have to be political decision: if they don't act it will be baking in extra costs for the economy." David Blackman, policy correspondent "This is fast going from an energy crisis to an economic crisis." Simon Markall, deputy director of external relations, Energy UK energy crisis to an economic crisis." Simon Markall director of external relations, Energy UK

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