Utility Week

8 | OCTOBER 2022 | UTILITY WEEK Energy Analysis Energy bills support gamble is risky but unavoidable The unprecedented intervention on energy bills was clearly necessary but raises questions about setting a precedent for future state handouts – and fears about the size of the eventual bill. O ne senior energy analyst was on his way to the Channel 4 News studios on 8 of September to be interviewed for that night's bulletin about Liz Truss's land- mark 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. Now that the o† cial period of mourning for the Queen has ‡ nished, 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 eŽ ectively 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 Rishi Sunak's previously announced Energy Bills Support Scheme with pensioners and people on bene‡ ts 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 cli- mate issues. "It reŸ ects the scale of the cost increases and gets support to customers immediately and eŽ ectively because it's sim- ple 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 oŽ er," he says, while expressing surprise at the length of time the government has committed to eŽ ectively hold down prices for customers "It's quite risky," he says, noting that the open-ended nature of Truss's commitment could fuel investors' concerns about the UK government's ability to balance its books. The scale of support on oŽ er 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 Ukrainians have helped to reduce fears about relentless gas price increases, the volatile nature of this market begs the question, what happens if they go up again, asks Buckland. "The chal- lenge is beyond this winter. If prices g o up, the cost of the intervention will grow," he says. "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 last month, estimated that the bailout for house- holds could cost the Exchequer around £120 billion. However, the eventual ‡ gure 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§passed Such concerns will be ampli‡ ed by the Resolution Foundation's analysis, which shows that higher income earners will tend to bene‡ t more than their counterparts from the government's package. In addition, vari- ations in household sizes and the energy e† - ciency of properties, means that the analysis estimates around four in 10 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 Buck- land. "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, he argued in a recently issued paper for the right-of-centre Policy Exchange, is some form of social tariŽ that ensures those on lowest incomes pay only what they can aŽ ord. Ensuring that suppliers can target signi‡ - cant 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 aŽ airs com- pany Flint Global. It will be tricky, too, to withdraw the sup- port for businesses, which Truss promised would be "equivalent" to that on oŽ er to households. Newport says: "That's going to be a very, very expensive addition and some- thing that's going to be very di† cult to move on from." In this context, the government's pro- posal to revisit the support on oŽ er in the

• Cover