Just throwing money at people is not going to work.

On Saturday (27th August 2022) British newspaper The Daily Express ran a headline stating that Departing PM Boris Johnson declared a “pipeline of cash” to ease the financial strain on people suffering as a consequence of the energy crisis. Whilst to some people this may seem like music to their ears, it may come as a shock (pun intended) to realise that this solves nothing. The overall level of increase in energy bills mean people are still going to be worse off, and once financially sound small and medium businesses will close in their droves and they suddenly become unviable. The failure of the energy cap proved that the utility system was not fit for purpose, and it took a perfect storm to prove it.

Since the National Grid and Gas Networks were privatised, we have had the following system: Producers/Wholesalers (BP, Exxon Mobil), who mine for fossil fuels and generate electricity at power stations; Utility Retailers (British Gas, NPower, E-On, Bulb), who buy units wholesale and sell to homes and businesses; Infrastructure Maintenance (Cadent, Western Power Distribution) who look after the network of pipes and cables that connect homes and businesses to the power stations and gas storage. The idea was to allow the concept of companies competing for your custom to keep prices low, as well as ease the financial pressures of running the networks from the Government. Which is all well and good, providing the industry is properly regulated to ensure fairness for both wholesalers, retailers and consumers.

Over time, something has clearly gone wrong. Some companies (such as British Gas and E-On) operate as both wholesalers and retailers; it is much harder to regulate either sector when this happens. Also, many producers have been announcing record profits which have not been passed down the chain. This squeeze on retailers has meant that their own costs have risen sharply, which has meant under the cost cap, they were operating at heavy losses. This is why so many small energy companies have gone bankrupt over the last year or so.

So why is the cost cap to blame?
The Cost Cap was introduced to limit the amount that the retailers could charge per unit of gas and electricity. It is updated every 6 months in April and October each year to reflect wholesale costs and inflation. This was great news for the consumers on its introduction, but this did not protect retailers’ outgoings. The wholesale price was not part of the limits. This has allowed the ballooning of wholesale costs to hit the smaller companies hardest, allowing the bigger retailers (most of whom also are wholesalers) to get a greater share of the market yet still using operating losses to raise the cost cap significantly. The fact that wholesalers are recording record profits, and the cost of wholesale energy is increasing significatly is no coincidence. Outside factors can and do influence wholesale costs but the levels of which seem barely justifiable.

What are the Government doing about it?
Households are seeing an 80% increase in energy bills in October outside of fixed tarriffs. This is on top of a huge increase that happened in April after the government decided to lift the cost cap in the wake of the bankruptcy levels amongst smaller energy firms. Costs are going from around £1500-£2000 a year to nearly £4000 a year for the average household.= in the space of 12 months. The Government announced a raft of measures including an energy rebate for those on income support, a £400 discount on people’s energy bills and additional rebates for those with disabilities and the elderly. Some people are receiving nearly £1,000 worth of returns from the Government which is covering little over half of the increase. A £5bn Windfall Tax on energy companies was also announced but is only effective on profits from 26th May, and comes with tax discounting under an Investment Allowance. [1]

For many people they are still facing large increases in bills even with these rebates and discounts. For businesses this will be even higher as the aid offered to them is even less. This is likely to lead to a spike in unemployment as this will put jobs at risk, meaning even more people will be on less money to cope with a spike in energy bills. Even if the Windfall tax does generate the maximum it can, it still may not be enough for the short term fixes.

What makes the situation worse is that despite fossil fuel producers facing an initial higher corporation tax rate at 30% plus an additional 10% supplementary rate, these are heavily offset by rebates for financial loss factoring and green schemes, meaning many of them receive more money from the Government than they pay in. This needs tighter regulation in order to ensure that profits are taxed properly and accordingly allowing more money available for Government schemes to help the country become more environmentally friendly.

It is common practice for very large and international businesses to exploit tax rebate schemes or use tax avoidance loopholes to reduce their overall tax bill which would not be too much of a problem if their profits were used to invest in more efficient and environmentally friendly technologies, giving their workforce decent pay and conditions, and making a difference in the world. However, finding such a business is a rare thing indeed. They will avoid spending money as much as possible in order to line the shareholder’s pockets, unless actively and legislatively discouraged from doing so.

In reality, the lack of regulation on the wholesale and production of our utilities is leading to hyperinflation to a catastrophic level. The wholesalers will continue to record ridiculous profits at the consumer’s expense unless something changes.

What options are most likely to solve the problem, or at least ease concerns over the ongoing energy crisis?
At a minimum, the cost cap needs to be properly regulated and supplemented by ensuring the regulation of wholesale and production costs to ensure smaller energy retailers can survive and continue to operate under freedom of choice and competition. Re-regulating the industry won’t be a huge expense, but may involve some aspects of the infrastructure to be brought into public ownership (such as National Grid).
Renationalisation of the industry, which is a proposition supported by Labour, Lib Dems and SNP, would have a large initial expense to the Government but will allow greater control of the services and regulations of the industry and would ease problems on vulnerable consumers. Whether the appropriate funds are available, or whether the Government would need to borrow even more money to allow for Nationalisation, remains to be seen.

It is also unlikely that under any re-regulation, we are going to see prices returning to their pre-crisis levels, even if they do manage to obtain a significant reduction in prices. More will need to be done in order to ease the pressures on households. Better insulating older houses, ensuring all dwellings have double glazing throughout, and investing in hydrogen boiler technology is a great place to start. Heat Source Pumps are a great green option however its system requirements mean a lot of current installations in older buildings are inadequate for such a solution.
Additional measures that can also make improvements to the sector include making it easier for people to buy and sell homes with solar power that sells back to the grid, give people the option of energy storage when using solar panels and making it cheaper for people to install them. By giving households and businesses the opportunity to reduce bills by reducing energy consumption is vitally important.

In addition, the Government should also be looking at electricity produciton, fossil fuel or otherwise, to look to make financial savings and environmental improvements. Wind farms are an obvious route if you want to reduce reliance on using fossil fuels to generate electricity. However, the production of turbines, and their limited life span means that these giant structures require fossil fuels to build. This means that they still have a considerable carbon footprint upon manufacture, and a turbine that is not used effectively or requires excessive maintenance due to persistent breakdowns is likely to barely generate enough electricity to offset the carbon emissions from its production. Finding a way to produce the turbines to the same strength but at both a lower cost and carbon footprint would make a huge environmental difference. Also, an expensive-to-build but very environmentally friendly alternative would be nuclear. The capabilities of nuclear power are incredible and contrary to public perception is actually quite safe. I have linked a video of science enthusiast Kyle Hill explaining the benefits fo nuclear power and debunking dangerous myths that have stunted its progress. [2] This along with other alternatives such as tidal power generation would go a long way in reducing fossil fuel consumption and would reduce the impact of wholesale inflation of those fuel sources on household bills.

Unfortunately, there is no true short-term solution, and the current refund schemes are just throwing money down the drain, but better inroads can be made if the correct decisions can be made for the long term future of the infrastructure.

[1] https://www.bbc.co.uk/news/business-60295177

[2] https://www.youtube.com/watch?v=J3znG6_vla0&list=PLNg1m3Od-GgMx6MIu18VjuE17UtyN4xeJ&index=59&t=805s

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