We’re paying price of failing to reform our energy market
MILLIONS of hardpressed households will be relieved at yesterday’s news that the Energy Price Cap will be lowered to £2,074 from July 1. Given that energy prices are currently pegged at a level where the average annual bill is £2,500, it should mean a saving of around £426 a year.
But it is hardly the end of the cost of living crisis. Overall, inflation is still running at nearly 9 per cent. This week saw the Consumer Prices Index falling to 8.7 per cent, far less than many economists had hoped. Food inflation is running at nearly 20 per cent, meaning that what we save on fuel bills will be disappearing straight out of the door on food bills.
Inflation has been a global problem since the end of the pandemic. Money-printing by central banks combined with handouts such as furlough pay- ments helped stimulate demand for goods and services while lockdowns and other Covid measures constrained supply.
That is a strong recipe for inflation. Yet Britain is beginning to look a bit of an outlier for the slow rate at which inflation is falling. In Germany inflation is down to 7.2 per cent, France 5.9 per cent and the US 4.9 per cent.
WE ARE in danger of heading back to the days when high inflation – along with strikes – was an especially British disease. With pay demands soaring, expectations of future inflation are beginning to seep through the economy. Once it becomes established, as we found out in the 1970s, inflation can spiral – as wages and prices chase each other upwards.
The Bank of England wasn’t alone in failing to spot the coming inflationary surge, but its forecasts were especially useless. In May 2021 it was still predicting the CPI would rise no higher than 2 per cent – the target set by the Government.
Yet the CPI ended up a shocking five times that level. Even when it became clear we were experiencing an inflationary surge, the Bank was slower to react with higher interest rates than its US counterpart, the Federal Reserve. Britain now faces higher interest rates over the coming months – and possibly years – than it would have done had rates been raised earlier and faster.
It is astonishing, given the scale of the Bank’s failures, that governor Andrew Bailey is still in a job. But high inflation isn’t only down to him and his colleagues on the Monetary Policy Committee. They can’t be blamed for Vladimir Putin’s invasion of Ukraine, nor for Europe’s energy policy which made the continent so dependent on Russian oil and gas.
Yet Russia is not the whole story behind Britain’s stubbornly high energy prices. It is remarkable that even after the Energy Price Cap falls to £2,074 in July, bills will remain twice as high as they were before the invasion. How come, when wholesale gas prices have fallen to the levels they were in early 2022, and when we keep being promised that renewables are bringing us copious quantities of cheaper power?
The truth is, Britain has a deeply perverse energy market which, in spite of the supposed competitiveness offered by privatisation, is giving us some of the highest power prices in the world. Under the rules of the British market, suppliers who are generating power at the same moment are paid the same rate – no matter how much it costs to generate it.
For example, we might have gas plants, wind turbines, solar panels and nuclear generating 39.9 gigawatts of power. But if Britain is using 40 gigawatts, the national grid will have to buy an extra 0.1 gigawatts from sources such as battery storage or from imported electricity.
That extra 0.1 gigawatts is often extremely expensive – and yet everyone who is generating power at that moment will be paid the same, high rate.
THE SYSTEM may have made sense when most of our electricity was from coal or gas. But the adoption of intermittent wind and solar has created troughs in supply which need to be filled at short notice, increasing the need for short-term generation.
Rather than reform the system, the Government has tried to compensate consumers with price caps – while clawing back, through windfall taxes, some of the power generators’ profits.
Net Zero commitments will make the problem worse. By 2035, the Government plans to eradicate gas from the national grid, which would make the country dependent on expensive energy storage.
July will bring some relief for households, but our energy market needs deep reform, and the Government should not use falling prices as an excuse to duck out of it.
‘What we save on fuel bills will disappear out the door on food’