How to tackle the energy crisis properly

Neither the Government nor its opposition understands that we have a crisis because there is too much energy demand, and not enough supply.

I would not be the first to point out that Liz Truss and her cabinet are hardly a reservoir of sound strategic thought. Nevertheless, it is worth emphasising that the government is stumbling through a particularly irresponsible collection of policies in response to the energy predicament we find ourselves in.

The energy relief scheme will cost the country somewhere between £60 and £80billion, a colossal sum of money. Compare that to the relatively piddling £2-3billion associated with the eradication of the 45p tax rate, or lifting the cap on banker’s bonuses, which has no fiscal impact at all, in and of itself. Perhaps unwise policies, time will tell, but hardly bank breaking by comparison.

The reason the value of the pound went haywire for a few days (other than the much-ignored fact the dollar was rising in value) was not because of a perceived lack of fairness in the announcements, criticised as they were for being too kind towards the wealthy. Markets do not care about fairness. It was because the mini budget was costed by future imagined growth to pay for the borrowing of today. Not necessarily a bad thing, but a gamble for sure, and the kind of gamble which markets despise.

So, what is wrong with the scheme, other than its cost? Firstly, it will be applied universally, so the treasury will subsidise everyone’s bills, regardless of affordability, when for many people the rises would be perfectly manageable. Then, they have decided, not to give the money directly to consumers, but to apply it through a complex tariff subsidy with suppliers themselves. This means we won’t see our bills rise and therefore the natural ‘my bill is going up so I should consume less’ response from the population will be supressed. Consumption will therefore be normal, if not, higher than typical.

To complement this, the Prime Minister has now squashed plans for a campaign promoting lower energy use this winter. Whilst it is not necessary that it comes from central government and could adequately be put together by other bodies, such as Ofgem, it shows that the government (and opposition) do not understand the root cause of the energy problem. They think it is simply a case of people not being able to pay, so if that is handled, the crisis is handled.

The opposition think the problem is caused by generation companies price gauging, so if they are taxed and prices controlled, the crisis is handled. The government worries about losing office, so wants to pay people to avoid a winter of discontent. Neither understands that we have a crisis because there is too much energy demand, and not enough supply.

The supply issues can only be resolved long term, by increasing domestic energy sources, such as nuclear energy, onshore wind, and dare I say, a fracking trial, so we do not rely on competing for imports at ever increasing prices in an environment of radically unstable geopolitics. We will probably be OK this winter and avoid blackouts, but it will be a closer run thing than normal.

Demand however can be affected now, by the self-imposition of personal energy austerity. The best way to achieve this is to give the energy relief money to people directly (and only to those who genuinely need it- individuals dependent on the welfare system and low-income earners, as well as those vulnerable to cold stress, such as pensioners) so that they can win twice, by receiving the same value of financial support, whilst still seeing their energy prices lift, motivating them to reduce consumption if possible.

From the point of view of the recipients, you are protected from runaway prices, from the government’s point of view, they can start to alleviate the root cause of the energy problems, and from the treasury point of view, they spend less in total by not subsidising those who can adequately cope with their own resources. The only people who wouldn’t benefit from such an arrangement would be the financially comfortable. The markets would have reacted with less volatility and the new PM would not have looked as foolish quite so quickly.