Martin Shaw unpicks the motives and the structural economic forces behind the Chancellor’s decision to further inflate household energy costs
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During his fiscal statement last week, Chancellor Jeremy Hunt reneged on the Government’s pledge to limit annual household energy costs to £2,500 until 2024, pushing the average amount a household may pay up to £3,000 from April. This is a nominal rise of 20% but 40% in real terms for most people, since the Chancellor will not be continuing the £400 support given to each household this winter.
Far from being ‘compassionate’ towards the most vulnerable, as some commentators have claimed, Hunt’s £900 grant for families on benefits is less than the £1,029 extra that will be added to average bills. And many poor households are not on benefits.
As Torsten Bell of the Resolution Foundation points out, Hunt’s measures create “a cliff edge between those on Universal Credit and someone earning too much to qualify, who gets nothing”. What’s more, many poor households have above-average fuel consumption and will be even worse hit, since fuel-price vulnerability does not map neatly onto income levels.
Leaked official guidance on tenant protection states that homes should be heated and ventilated to remove the moisture produced by cooking, bathing and drying clothes, but notes residents “may choose not to use” heating.
Yet, since the Government’s inadequate support for benefits claimants is paid as a lump sum, research shows that most of it is inevitably used for costs other than energy. Few recipients of the first grant “were able to set aside the additional money they received to help they received to help mitigate the unprecedented increase in gas and electricity prices”, the research found.
Poor families will simply not use sufficient heating while costs remain astronomically high. However, instead of lowering them, Hunt has added a punishing new rise.
We need to grasp how severe this year’s increases have already been. It is widely reported that energy costs have doubled, reflecting the increase in the official price cap or guarantee on standard variable rates, which rose by 54% in April and 27% in October 2022.
However, this seriously underestimates the true impact of price rises, since a year ago 40% of customers were on fixed deals that were substantially cheaper than variable rates and faced an average 45% increase when they were forced onto the latter around the end of 2021.
In this situation, the financial stability of middle-income families (especially higher consumers), who will receive no targeted support, is also sharply threatened.
Even some individuals who generally don’t support the Government apparently believe that it is acceptable to expose consumers who are not on benefits to massively increased costs – even while they face falling real wages, stealth increases in income and council tax and 15% hikes in food and other core costs – because these are ‘market rates’ resulting from Putin’s war in Ukraine.
It is little acknowledged the extent to which market prices are political constructs.
Political Games
The Opposition has pointed out that UK consumers are now paying far more for energy than those in most EU countries, because of Government failures. Over the past 12 years, when the Conservative Party has been allowed household heating to rely on gas, it has failed to create the gas storage needed to cope with price shocks, blocked onshore wind generation, and abandoned support for home insulation.
However, prices are also higher than they should be because of the way that the legal structure of energy markets was confirmed by the Energy Act 2013. As a result, although gas now produces only a-third of UK electricity, prices are still tied to gas, led by gas bought on international markets.
As a result, consumers have seen little price benefit from the much cheaper electricity that renewables (now accounting for almost half of generation) provide – indeed, green energy providers are actually more expensive.
The five-year review legally required by the 2013 Act was not launched until this May, and the Government only introduced a three-month consultation on the electricity market. The new Energy Prices Support Act does make provision to shift electricity generators onto a long term fixed price decoupled from gas prices, but this is subject to detailed secondary legislation and will not come into force any time soon.
So, while it is generally accepted that electricity should be decoupled from gas prices, consumers – including the one in nine who rely on electricity for heating – must pay a high premium.
The Government could have opted to accelerate change, making emergency interventions, or even part-nationalising energy production, but it seems content to slowly push through reforms while millions suffer.
The extent to which the market is working against consumers is even clearer when the costs are added of bailing out failed energy firms – £6.5 billion for Bulb alone – which is adding hundreds of pounds to bills.
Meanwhile, daily standing charges – which providers have expediently raised during the crisis, and pre-payment meters, which force the poorest to pay in advance and at a premium – create a highly regressive market. Indeed, the cost of living crisis is forcing more poor consumers onto pre-payment meters.
The Energy Price Guarantee is described as a state ‘subsidy’, but it is more accurate to say that consumers are subsidising the super-profits (which could amount to £170 billion in the next two years) that the state is allowing energy producers to make from inflated consumer bills.
Far from being generous, Hunt’s measures largely recycle, through modest windfall taxes, a small part of these excess profits back to consumers. He is largely funding his price guarantee (costing £12.8 billion in 2023-24) and the cost of living payment to benefit recipients (£9 billion) from a windfall tax on energy profits, minus loopholes which incentivise fossil fuel investment.
Meanwhile, the Treasury will recoup billions from consumers through VAT on their inflated bills, which should raise more than £3 billion in 2023-24. Hunt’s price guarantee level neatly absolves Rishi Sunak from honouring his pledge to suspend VAT if the price cap exceeds £3,000.
The politics of this go beyond the illusion of state munificence. Four days after Rishi Sunak became Prime Minister, he brought back Isaac Levido, the election ‘guru’ who helped the Conservatives to win in 2019 – orientating Hunt’s package around crude political ambitions.
In delivering his statement, Hunt signalled he will claim falling inflation in 2024 as proof that his policies have worked – despite a painful hike in energy costs that will saddle households prior to 2024.
In the face of the Chancellor's additional increase, the opposition benches have gone strangely silent on energy costs.
We hear little of the pledges made by Labour and the Liberal Democrats during the Liz Truss era limit prices to the £1,971 April 2022 cap – itself 54% double the fixed rates that prevailed a year ago. This, together with the removal of VAT, pre-payment meters and standing charges, is the minimum that opposition parties should press for. And, in the background, they must demand urgent action to unpick the structural market arrangements that have made the UK’s energy price crisis so much worse.
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