Would industry plan to slash energy bills work?

It was at a meeting with the PM earlier this month that the energy industry first floated the concept of an Energy Tariff Deficit Fund. This was an evolution of a previously rejected idea to fund the smoothing of the spike in gas prices over a decade or two.

The key takeaway from this is that the energy industry are now all on the same page on this idea. Some firms did not back a previous iteration of the plan, with British Gas owner Centrica notably referring to it as a "bailout" for energy firms in January.

The version of this plan circulated earlier this month envisioned a fund worth upwards of £90 billion. Instead of a price cap equivalent to an average household dual fuel bill of £4,000, prices would peak at £2,000. The difference would be paid for by the fund with some sort of state backing.

The fund would be repaid by charging customers a few hundred pounds extra every year for the next decade, leaving energy cap costs slowly declining but pretty close to £2,000 a year on average into the 2030s. Another version of this was presented to government by Scottish Power last week, as my colleague Simon Jack revealed.

Unworkable?

The big issue here is that such a plan on its own will not work. But the prospect of bills of £500 per month - effectively a second mortgage - cannot work either. The government has already deemed that existing energy price levels are not sustainable for millions of poorer households. If this was the price locked in for a decade, then the government's support packages would also need to be extended.

This is effectively one half of a plan. The other half would be to find some funding. On this there was less agreement among the industry. Three options were floated. Repaying the fund with bills close to £2,000 a year for a decade, as detailed above. Repayment through general taxation. Or funding it through an extended windfall tax on "extreme profits" at energy companies. The record earnings reported by such firms are set to increase yet further as gas prices surge even higher.

The wider point here is that at a time of war, the international price of energy is forcing a massive transfer of wealth from every household to energy producers in the private sector, and those owned by foreign governments.

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All of this collides with some of the rhetoric of the Conservative leadership campaign. Liz Truss has ruled out windfall taxes saying she "absolutely won't support" them. Rishi Sunak said help should be focussed on the poorest. His successor as chancellor, Nadhim Zahawi, echoed that view on Wednesday. There is a view among economists that the section of society that amassed savings during the pandemic should use some of that to pay these bills.

The counter argument is that forcing down the energy cap in this way is far simpler, and has the immediate benefit of also keeping the actual rate of inflation down, at least in the short term.

There is no certainty that the new prime minister will go with this plan. If the industry is getting support, questions will arise about bonuses, dividends, and executive pay across the sector. But unlike in January, the industry is speaking with one voice on what they think is required. Raising the energy cap to the equivalent of a second household mortgage, they say, simply cannot happen.