What should the government do about the rising cost of energy?
What started as an energy crisis is becoming a cost of a living crisis. What should the government do?
Rising energy costs have been making the news on a regular basis over the last six months. Over the last few weeks, however, public interest has reached new heights. What started as an energy crisis is becoming a cost of a living crisis.
Alongside a planned hike in national insurance and increased costs across the economy, energy bills are set to go up by £700 per household. This will be felt by many, but for fuel poor households it has the potential to be devastating.
Around 25% of UK households have an after-tax income of £20,000 a year or less. If one of these families had switched to a low-cost tariff this time last year, they could now be looking at an energy bill that is well over double what it was before, costing them more than 10% of everything they earn.
The government need to act now if they want to ease this burden. Here is our take on some of the things they should, could, and shouldn’t do:
Smoothing costs over time
We support Ofgem’s proposal to help spread the costs of the failed energy suppliers. Wholesale gas prices are primarily driving the energy crisis, and that has pushed numerous suppliers into insolvency which in itself brings further costs that Citizens Advice estimate could cost each billpayer £94 — a kind of snowball effect. Plans to recoup these costs over several years rather than several months is a good start, but not enough. Government should act quickly to provide additional relief to billpayers by smoothing the high wholesale costs which would otherwise need to be passed on to customers this year.
This could reduce bills by hundreds of pounds and (unlike scrapping VAT on bills) the government will get their money back eventually. This provides relief to billpayers on the one hand, and value to taxpayers on the other.
The Warm Home Discount (WHD)
Another solution would be to make changes to the Warm Home Discount – currently a payment of £140 a year to those deemed to need it the most. It’s due to rise to £150 next year, but many are calling for it to be increased further. However, it would not be enough simply to increase the level of the grant, as many of the households requiring support with their bills in the coming months will not currently be eligible. The additional cost of this would need to be covered by government to prevent everyone else’s bills increasing, as currently it is paid for by other billpayers. Adding to the challenge is that the legislation for this year’s scheme is yet to be passed, so the government really are on a race against time if they want to pursue this option.
Windfall taxes
Some have proposed that a windfall tax on oil and gas company profits be used to fund support for billpayers this year. This approach was tried in Spain last year, to limited degrees of success. However, oil and gas companies have profited excessively from the energy crisis – if there is a way to return some of these profits to consumers, without damaging investment in renewables, then it should be pursued.
Removing VAT from energy bills
While it might be a relatively simple proposal, and is certainly better than doing nothing, we don’t see removing VAT from energy bills as the best solution. Costing the treasury well over a billion pounds, this would reduce everyone’s bills by just 5% — simultaneously not providing enough relief to those in real need, whilst also using taxpayer revenues to reduce the bills of those who can afford to pay.
Unlike loans or deferred costs, treasury doesn’t get this revenue back. To put it into context, with a similar spend we could give the five million poorest households £300 a year, fund three million energy efficiency retrofits or fit 1.5 million heat pumps.
‘Scrapping’ green levies
We strongly oppose the call from some MPs to ‘scrap green levies.’ They propose to cut the Energy Company Obligation (ECO), which provides energy efficiency upgrades for low-income households. The UK’s housing stock is currently the draftiest in Europe; the more efficient we make it, the more resilient we will be to gas market shocks in the future.
However, we completely support a review of how these schemes are paid for – as the government has already committed to do later this year. Moving some costs from electricity bills into general taxation would be a more progressive approach and make clean heat and transport even more cost effective.
In the short term, whatever the government choose to do, they need to do it now. The longer they wait, the more difficult it will become to ensure that billpayers get the relief they need.
In the long run, the path is much clearer. We need to reduce our reliance on fossil fuels by bringing on more renewable electricity generation, making our buildings more efficient while heating them cleanly, and using low carbon transportation.
