Truss unleashes cash and unknowns with energy package

The UK now has considerable experience rolling out vast, multibillion pound support packages to cushion households and the economy in the hope that a crisis is going to lift. The pandemic did — eventually. The furlough scheme was extended four times in the process.

Liz Truss, the new prime minister, seems to have learnt from that. Her pledge to cap the average household energy bill at £2,500, including the suspension of so-called green levies and the already announced £400 grant, lasts two years. That is good: futures markets suggest wholesale gas prices could be very high next winter and stay elevated into 2025.

The scale of the support, from a leader who eschewed the very idea of handouts, is also welcome. But in crucial areas there are questions for households and businesses, as well as the industry and the taxpayer.

First, this support comes at huge and as yet unknown cost. There were few details to support an estimated £150bn figure on Thursday. As the government seems set to cover the difference between the new price guarantee and what would otherwise have been charged, the total is in effect uncapped: if gas prices soar higher so will the bill. There was no hint that a more targeted approach would come later on.

It remains unclear how that cost will be met. Initially, the Treasury and government borrowing will take the strain. But the promise of a forthcoming financing scheme suggests that the government may still harbour ambitions to use private financing provided by banks and hit customer energy bills to pick up at least some of the tab.

Second, both businesses and vulnerable households don’t quite have the long-term security suggested by the headline promise. Business support will only run for six months, after which the government has promised support to “vulnerable industries”. No one knows which those are; nor how business bills, which don’t rise in a uniform fashion like domestic tariffs, will be capped. Businesses still have no certainty over what they will be paying.

The government also didn’t confirm that the support already on offer to all households, or more importantly the most vulnerable, will continue for the duration of the two-year energy price guarantee. It is the £400 discount, announced by Rishi Sunak in May, which means that energy bills will only rise slightly in October from the current tariff cap of £1,971, with £1,200 means-tested help to poorer households. It is not clear if those will be repeated or what will take their place.

Third, the prime minister is absolutely right to decry “decades of short-term thinking” on energy. But the announced measures on supply, fracking aside, largely echoed existing policy. Absent again was any mention of energy efficiency, despite the fact that the Treasury finds itself, for now, wearing the financial risk of a decade of failed policy and the oldest, leakiest housing stock in Europe. UK homes lose heat up to three times faster than houses in continental Europe. In reality, insulation is now a topic for next winter — but nor was there any mention of a public campaign or rules, say for public buildings, to reduce energy use now.

A remaining question concerns what a new Energy Supply Taskforce might achieve. The comparison to the pandemic vaccines effort is odd: that consciously threw cost considerations out of the window in favour of speed and bet hedging whereas the energy effort aims to lower costs through long-term contracts, something that seems challenging in the near term amid stiff competition for supplies.

Getting tough on new terms for existing renewables producers is one job, as Lex explains. But the suggestion seems to be that the government wants more broadly to establish itself as a big, centralised buyer of gas and LNG, from companies and other countries, at the same time as recasting power contracts, and while redesigning a retail market and regulatory framework that no longer fits the bill.

Truss continues to resist the idea of greater capturing of windfall gains from gas producers and power generators on the basis that it will deter investment. But the major questions about an overhaul of the system from upstream production to consumer supply will need answering quickly, if it is not to have precisely the same effect.

helen.thomas@ft.com
@helentbiz