Liz Truss’ energy transition leaves the market in chaos

Announcing her two-year energy price guarantee, Prime Minister Liz Truss condemned the “decades of short-term thinking” that has left Britain facing an energy crisis.

Her long-term approach took less than six weeks.

Chancellor Jeremy Hunt’s announcement on Monday that the £2,500 energy price guarantee for a typical household will expire in April has left the energy market in chaos, with complete uncertainty over who will be supported, at what prices or in what ways next spring.

A government that has spent months vetoing investment-protection-based windfall taxes (before effectively levying them anyway) has injected a particularly pure form of political risk into the UK energy supply market – and has at least part of it financial burdens again increased the rising energy costs back on the households. At current wholesale gas prices, a typical annual bill next April could be £4,000.

This reversal – as well as the erosion of Trussonomics’ “mini” budget – was of course forced by turbulence in the markets. The energy price guarantee for households and businesses was blunt and expensive, projected to cost £60bn for the first six months alone.

But by accepting the need to put support where it’s needed most and embedding incentives to curb use, particularly for wealthier households, it also simply bows to the common sense of politics. “The original program was an unsustainable, unfunded guarantee,” says Adam Bell of energy consultancy Stonehaven. “It feels like adults are in charge again.”

Finally, the broad, universal nature of the Truss scheme was a direct result of months of conservative psychodrama wasting time that could have been spent developing a properly targeted approach. It goes without saying that when energy bills are high, beneficiaries need plenty of help. The question was how to train support further up the wage distribution to get tax or income information in one part of government to interact with databases elsewhere. The IT project required could have taken an estimated six to 18 months and should have started in earnest months ago.

Now the Hunt-led Treasury has some time to ponder how to do this properly. However, it is currently completely unknown who will be asked to pay for how long from April. Faced with the challenge of developing an entirely new system, part of the market could fall back on the increasingly irrelevant Ofgem tariff cap, while another part of households are isolated from wholesale market movements by a social tariff. There could, says Bell, be a graduated scale in between. Whatever happens, it will only be a stepping stone towards a broader reform that separates household energy bills from international gas prices.

The reopening of the question of energy prices should go hand in hand with consideration of how the subsidy will be financed. Targeting alone may not reduce Treasury bills as much as Hunt hopes, argues Ian Mulheirn of the Tony Blair Institute for Global Change.

How much will depend in part on political will to impose pain on middle-income households, with consequences for spending and the economy. Reducing support for households that do not receive benefits by 25 per cent could save around £12.5bn out of an estimated £70bn in annual household support costs, says Mulheirn, based on typical £5,000 bills.

Suppliers and growers are now in the dark as to how their business will function next April. They face an unexpected tax in the form of a cap on revenues from legacy renewable energy generation, which the new Hunt regime may yet reword. The industry is also concerned about the sweeping powers that the Energy Prices Bill going through Parliament will give to Business Secretary, currently Jacob Rees-Mogg, including the ability to change energy licenses or direct license holders at will.

It’s a well-known story in British politics in recent years. This government said it prioritizes certainty, stability and a good energy investment environment. It delivered exactly the opposite.

helen.thomas@ft.com
@helentbiz