Energy market is sword of damocles hanging over UK’s new leader

UK Prime Minister Rishi Sunak has been in office less than a week, but the clock is already ticking on what could prove to be the most dramatic economic intervention he needs to make in coming months.

After predecessor Liz Truss’s short-lived government scaled back its original support package for energy bills, a decline in the wholesale gas market and unseasonably warm temperatures have bought Sunak some time to come up with a new plan for when a price freeze guarantee ends in April. Costs for the average household are forecast to potentially double, and economists expect inflation would exceed 15% without government action.

Rishi Sunak. Image: Chris J. Ratcliffe/Bloomberg

Sunak is charged with steering Britain through one of its most perilous financial periods for decades, and the crippling price of energy is weighing on the economy. Already 6.7 million households are in fuel poverty, defined when energy costs exceed 10% of their income. Gas prices will remain unaffordable for most families well into 2024, according to Scottish Power, one of the country’s biggest energy suppliers.

The government has so far shied away from encouraging households to adopt energy efficiency measures, with Truss even blocking a campaign for this winter. Cutting use, though, has long been seen by the industry as an easier way to lower bills.

Chancellor of the Exchequer Jeremy Hunt marked reducing consumption as a priority in a speech on October 17. Increasing the efficiency of Britain’s leaky homes is also critical for the country to meet its legally binding target to cut greenhouse gas emissions in the coming decades.

“It is clear the UK cannot finance an open-ended, universal blank check for energy for the next two years,” said Keith Anderson, chief executive officer of Scottish Power. “As well as targeting the ability to pay, we should be sending price signals on consumption in this market. Excess usage should be discouraged, or paid for at a premium.”

Hunt has promised a new package by spring that will be targeted more on people most in need. The UK’s progress on protecting its citizens against the harsh reality of the energy market, though, stands in contrast to other parts of Europe.

Germany has a €200 billion ($201 billion) energy crisis relief fund and France has committed to cutting consumption by 10% by trimming heating and power use in everything from public administrations and residential buildings, to shopping malls, stadiums and spas. European Union leaders are drawing up a package of emergency measures including a possible cap on gas prices.

The UK government’s measures must meet three objectives, said Philippe Commaret, managing director of customers at EDF Energy, the UK unit of Electricite de France SA. They need to provide enough support for needy households and businesses, be affordable for the taxpayer and make sure the energy industry is financially stable, he said.

The  price freeze is currently universal, benefitting even those households that don’t strictly need it. One of the chief reasons the policy was designed that way is that it’s difficult to identify lower-income households outside of the welfare payment system.

Then there’s also the impact of rising interest rates as homeowners come to refinance loans. That means politicians shouldn’t just distribute aid to those people who claim social security, according to the Resolution Foundation, an anti-poverty think tank.

“The scale of rising energy bills next spring — when pay packets will still shrinking and mortgage costs will be rising — means that the government cannot restrict support to those on means-tested benefits,” said Jonny Marshall, senior economist at Resolution.

The people that need help the quickest are those who aren’t on monthly payment contracts, according to Uswitch, which provides advice to consumers. The use of so-called pay-and-go energy meters is rising in Britain, causing concern that the poorest households may not be able to heat their homes this winter. The government needs to ensure that these customers are considered the highest priority for additional support beyond April, Uswitch said.

A pylon above residential houses in Brighton, UK. Image: Chris Ratcliffe/Bloomberg

Several energy suppliers back the idea of a social tariff, or energy at a subsidised price available only to people below a certain level of income and with the discount covered by the government. Companies want to avoid being saddled with bad debt from customers who can’t pay their bills, a figure already running into billions of pounds.

The UK is planning to help partly pay for any future aid package with a cap on revenue from generating clean electricity. The Energy Prices Bill became law last week, giving new Business Secretary Grant Shapps power to claw back profit from companies benefitting from higher power prices. Energy companies derided the measure as harmful to investment.

“Attention needs to turn to what a replacement scheme looks like from April to ensure that those who need support receive it,” said Gareth Miller, CEO of analysis firm Cornwall Insight Ltd. Whatever is decided needs to “form the foundation stones of an enduring, fair and sustainable market after the current crisis subsides,” he said.

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