The Daily Telegraph
An energy price freeze is a recipe for blackouts
Dulling the incentive for people to save energy this winter will only result in state-directed rationing
The Government takeover of our energy system is almost complete. What began in 2008 with plans to shut down coal is apparently about to reach its grand finale: price controls and, their inevitable bedfellow, rationing.
Details are yet to come, but broadly, freezing energy prices as the new prime minister plans would mean that while suppliers would still buy on the crazed wholesale market this winter, consumers would be protected and continue to pay bills at rates similar to today’s. In one way or another, the state would plug the gap. Liz “no handouts” Truss and Kwasi “lean state” Kwarteng are reportedly preparing one of the biggest handouts ever conceived – well, since Covid.
Of course, unless she is willing to allow mass extreme hardship and depression-causing price rises to sweep the country, Ms Truss has little choice but to do something dramatic. The new Prime Minister does, however, have some choice over whether to target the help at the poorer half of the country or to bail us all out together. Implementing a price freeze that helps everyone is the wrong approach.
Supporters of a price freeze tout two advantages. The first is that it is simple to implement. There is limited scope for some bozo at EDF or British Gas to send the wrong letter out and terrify the wits out of their vulnerable customers. The second is that it will avoid generating a flurry of marginal cases: households or businesses that are struggling but, due to the design of the targeted help, are left out in the cold. Ms Truss seems to have decided that such cases are a political pitfall she would rather avoid.
But failing to target help to those who need it, and instead throwing vast sums of money at the rich, will have damaging consequences. The first is that it removes the incentive to reduce energy usage. Prices are telling us that we are desperately short of energy and need to reduce demand. When you dull that signal for everyone, including the most profligate, you leave no reason for them to economise. The relative attractiveness of energy efficiency measures will not rise as it should.
Instead, the Government will have to rely on state-directed rationing. With much of Europe adopting price freezes, there is not going to be enough gas to fill demand. The extra gas we buy on cold days from Continental storage tanks will not be available. Instead, heavy industry will be shut down, with dire consequences for growth and jobs, and we’ll see street lights dimmed and offices forced to use power sparingly.
The second problem with a universal price freeze is the cost. We are in the realm of tens of billions in spending, but a more targeted policy could halve the bill. One such scheme proposed by the Resolution Foundation has an estimated cost of £15billion for this winter, versus £36billion for universal support.
Given the poor state of the public finances, rising interest rates, and the fact that we have no idea how long this is going to go on, the costs could easily spiral into dangerous territory. The only way to defray them would be through tax rises on consumers and energy producers or by extending a price freeze to wholesale markets, where the producers sell energy. The EU is already exploring such an option.
This opens up a fresh can of worms. The overwhelming imperative should be to get producers to increase supply as quickly as possible. A botched intervention in the gas market risks precisely the opposite effect, reducing gas shipments to Europe and discouraging investment, prolonging the crisis and increasing its cost.
The main objection to targeted help seems to be that it is hard to implement. There is, we’re told, no definitive list of households and firms that will need the most assistance. But we do have proxies for such lists and data to expand them as needed: benefit recipients, pensioners, tax returns and furlough data, not to mention detailed information held by utilities on their customers.
Given the Government was able to set up and administer a furlough scheme for 11.7million people within a month without a hitch, it seems a stretch to believe that it cannot get a system up and running for a similar number of households in a similar timeframe.
The alternative is the ridiculous prospect of millionaires being paid thousands to heat their mansions. This is not good stewardship, it is not sustainable and it is not necessary. It would not be a good start to the Truss administration.