How can the government solve the energy crisis?
- Published
Business Secretary Kwasi Kwarteng will chair a virtual meeting with the energy industry later on Wednesday to consider alternatives to tackle what energy providers and others are describing as a national crisis.
There are three fronts to this crisis: household consumers, business customers and the energy companies themselves.
The government has made clear its number one priority is domestic consumers, although that is arguably the least urgent of the three.
Most consumers are protected by the continued existence of the energy price cap. It may have bankrupted two dozen providers, forced to buy wholesale gas at higher prices than they are allowed to sell it, but it means that millions of bills are capped at £1,277 for normal domestic usage.
That current level will remain in place until 1 April, but the new cap level will be announced in early February.
This is the deadline that government officials are working to when trying to figure out how to protect consumers, who will struggle to pay their bills when the cap rises by an estimated 50% or more.
What are the options?
The options include abolishing VAT of 5% on energy bills. This would be quick and easy, but is considered a blunt instrument, as it would provide support to well-off customers who don't need it. For those that do need it, 5% of a possible £700 price rise is pretty small.
The government could temporarily suspend the additional levies on bills that fund green policies. That would be a tricky sell in some quarters, after the UK hosted a major global climate summit, and these levies are designed to reduce dependence on volatile fossil fuels. This option is, however, gaining support among some Conservative backbench MPs.
One other option is to extend and expand the Warm Homes Discount. Currently, customers in receipt of certain benefits can apply for a one-off payment of £140.
That could be increased. When quizzed on Tuesday on what the government was considering, the prime minister reached for his energy briefing crib sheet and this was on the list.
Another option - suggested by the industry - would be to subsidise the energy companies themselves, by establishing a fund or facility which would allow them to draw down government cash when wholesale prices were very high and then pay it back when prices dipped again.
This would smooth out price spikes and would have the added benefit, energy providers argue, of preventing further providers going bust.
Even those that have survived so far have warned that their ability to insure themselves by buying the gas they need in advance is beginning to unravel, as higher prices are outlasting their advance orders and exhausting their day-to-day cash.
Officials seem cool on this idea at the moment. Any such fund would need Treasury approval and no concrete proposal has yet made it to the chancellor's desk.
What could happen next?
Potentially, the most urgent problem is the needs of businesses who use a lot of energy and are not protected by any cap.
There were dread warnings from those firms before Christmas that many would imminently go bust, but government sources point out that so far, Armageddon has not materialised.
Government officials also point to the extreme volatility of wholesale prices. On Christmas Eve, prices hit 450p a unit - nine times the level last year. On Tuesday they were back to 150p.
It is hard and expensive to design a mechanism to accommodate wild swings which are affecting energy markets and their customers everywhere - not just in the UK.
Expectations of any breakthrough on Wednesday have been played down by people close to Mr Kwarteng.
- Published26 May 2022
- Published1 December 2021
