Why is the UK experiencing a surge in energy costs?
The UK relies very heavily on gas imports to meet its heat and power needs.
Gas is used to heat around 85% of homes in the UK, and 40% of our electricity comes from burning gas. The UK imports 51% of its gas supply, which makes us dependent on the availability and price set by other nations.
As the world economy has rebounded following Covid-19 lockdowns, supplies of gas have become stretched, which has caused a huge rise in prices.
This increase in costs has caused 28 energy suppliers to go out of business in the last 12 months, and the pain of higher prices is soon to be felt by energy customers when the energy price cap goes up on 1st April 2022.
The price cap change is expected to be the highest on record, with costs increasing by 50%. This would mean that a household currently paying a monthly Direct Debit of £100 will have to pay £150 each month.
Combined with record levels of inflation and rising food prices, energy costs will soon become unmanageable for millions of homes across the UK, forcing many to choose between heating and eating.
To prevent unprecedented numbers of households being plunged into fuel poverty, the UK Government must act swiftly and decisively. In response to this crisis, we look at some of the solutions available while analysing their pros and cons.
Short term solutions
Energy prices are going to increase dramatically on 1st April 2022.
To protect the most vulnerable in our society from becoming self-disconnected (for example, choosing not to use hot-water or internet) and to avoid the risk of building up unmanageable fuel debt, here are some possible policy responses that could alleviate suffering in the short term:
Broaden the Warm Home Discount
The Warm Home Discount is an annual payment of £140 made to eligible households who claim benefits and live with children, someone with a disability, or someone on pension credit.
The value of the discount could be increased to £400, and the eligibility criteria should be broadened to include those on low-incomes who do not currently qualify.
This could be paid for by moving the Warm Home Discount into general taxation instead of being funded through a levy on energy bills. The increase in energy bills since October 2021 has already added a windfall of £3.1 billion to Chancellor Rishi Sunak’s budget, and many believe this extra tax take should be focussed on alleviating energy bill stress.
Better targeting of the Winter Fuel Payment
The Winter Fuel Payment is an annual support payment made by the Government to people over 66 who receive a state pension or another social security benefit.
Currently there are lots of people who receive this payment who do not need it, which is why so many donate their Winter Fuel Payment to the Wenceslas Project.
The Winter Fuel Payment could be better targeted to reach those in most need, freeing up funding for other vulnerable client groups.
Remove VAT on energy bills
A lot of attention has been given to the idea of removing the VAT on energy bills for the next 12 months.
VAT currently accounts for 5% of the cost of a bill, which is about £90 on an average annual bill.
Whilst a policy like this has the appeal of being delivered quickly, it takes a very ‘broad brush’ approach, and would cost the Treasury around £2 billion over the next 12 months.
Instead of pursuing such a blunt ‘one-size-fits-all’ tactic, we believe that the Government should employ a strategy that reaches those at risk of fuel poverty, and focus resources on those who really need it.
Better regulation from the industry regulator
Energy suppliers have gone out of business because of the lack of regulation concerning their power sources and trading contracts.
This oversight by the regulator has destabilised the industry. BHESCo has been warning for years that a strategy of switching energy suppliers to obtain a better tariff is not a long-term sustainable practice and that a programme of building clean power generation is required for real energy security.
Longer term solutions
There are two reasons the UK has ended up in such a crisis:
- an over-reliance on fossil fuels
- an old and inefficient housing stock.
For too long, successive governments have delayed taking meaningful action on improving the energy efficiency of our homes, whilst continuing to prop up the fossil fuel industry through subsidies and tax-breaks.
The dangers of such short-sighted policymaking have been brought to bear by the current energy crisis, a crisis which will become increasingly common as global fossil fuel supplies dwindle.
To avoid such hardship again in the future, we must pursue policies now which will reduce the UK’s exposure to volatile fossil fuel markets, whilst simultaneously delivering on our climate change commitments.
Here are some sensible, cost-effective, long-term solutions that will avoid such a crisis happening again:
Greater renewable energy deployment
The most effective way for the UK to protect itself against future global energy market shocks is to meet our heat and power demands with our own locally generated supply.
Natural resources like solar, wind, and tidal power can be combined with energy storage to meet 100% of national demand.
These types of renewable energy sources are not only better for our planet because they do not emit harmful carbon emissions, they are also significantly cheaper to deploy than fossil fuel projects.
Establishing a new oil or gas supply requires millions in upfront costs, in addition to continual pumping, refining and shipping. New nuclear power stations take years to develop, with costs spiralling into the tens of billions.
Renewable energy projects on the other hand have relatively low development costs, and once they are up and running will provide free clean energy for the remainder of their operational lifetime. These lower development and operating costs can be passed on to consumers, who enjoy a fair and affordable price for their energy and do not have to worry about turbulent market fluctuations (or destructive carbon emissions).
What’s more, unlike an offshore oil-rig or shale fracking operation, renewable energy projects can be developed at a local level, providing communities with an opportunity to own and operate their own energy generation, removing the need to purchase energy from a supplier altogether.
Bring all properties up to an EPC of at least C
To ensure that the UK can meet 100% of its energy demand with renewable energy sources, we must introduce an ambitious nationwide retrofit programme to ensure that all properties have an Energy Performance Certificate rating (an EPC) of at least a C.
Improving the thermal retention qualities of our buildings will not only help to reduce bills and carbon emissions, but will result in a significant improvement in the quality of life for the millions of UK households who shiver through the winter months in cold, damp homes, putting their health at risk, especially older people.
By retrofitting homes with insulation, double glazing, and draught-proofing, we can greatly reduce the amount of energy required to heat and power a home, resulting in a big fall in energy costs. What’s more, ensuring that everyone can live in a warm and comfortable home will reduce the number of people admitted to hospital and relieve stresses on the NHS.
Grants could be made available to encourage homeowners and landlords to make improvements, which would provide much greater long-term value for money than a one-off payment or tax reduction.
Policymakers need to implement an immediate programme to train quality installers to do the work. They must recognise that there are hundreds of thousands of well paying jobs that can be created by the Government’s simple action to mandate that our homes are upgraded to a standard where they stop leaking heat.
This has been accomplished everywhere else in Europe with the UK having the worst performing homes. We have a real supply shortage, where there is lots of demand with no one to carry out the work.
Remove tax subsidies on fossil fuels
It is a shocking fact that in the same year the UK hosted the international COP26 climate conference it also gave away £12.5 billion in tax credits to the fossil fuel industry.
These tax breaks can be considered as a subsidy, helping to prop up the fossil fuel industry and giving it an unfair cost advantage when compared to renewable energy.
Removing these tax advantages will make renewable energy sources even more financially competitive and encourage more homeowners and businesses to accelerate their transition to clean energy.
As greater numbers of people make the switch the renewables, supply chains will become stronger and costs will fall even further, creating a positive feedback loop.
Move environmental levies on energy bills from electricity to gas
Environmental and social levies should be shifted from electricity (where they currently represent >25% of a bill) onto gas (where levies are only 2.5%).
Two good reasons to do this are:
1) Households using electricity for heating are twice as likely to be in fuel poverty already, compared to those on gas
2) Electricity used for heating has lower carbon emissions even if it used directly, and by a much greater amount if used to power a heat pump
It could be challenging to introduce this now, as it may push gas prices too high, but the shift could happen as wholesale gas prices start to reduce. Levies could start to shift so that electricity prices come down before gas prices.
However, were support to be increased to fuel poor homes, the increase in gas price would actually serve as an incentive for people to switch out their gas boilers for heat pumps, especially if the UK invested in its own home-grown heat pump production facilities.
As fuel poverty rates are 11% and half of these have either electric or oil heating systems, the gain far exceeds the risk of increased fuel poverty, especially if adequate support programmes are in place.
High gas prices should make low carbon energy more economically attractive for property owners and businesses, and with a little help in the form of levies in the right place, the running costs of really low carbon heat pumps could be lower than gas – which will be a real incentive for thousands of homeowners.
Establish a consistent long-term decarbonisation and energy strategy that is independent from politics
One of the main things holding back the UK’s decarbonisation efforts is the continually shifting landscape in which businesses in the sector are expected to work.
All too often the Government will announce a new headline grabbing initiative which is rushed through, poorly designed, and destined to fail.
We recently saw this with the shambolic ‘Green Homes Grant’, an energy efficiency package which reached only a tiny handful of its intended target and was shelved after only 6 months. Hundreds of practitioners throughout the country were left feeling resentful and out of pocket, having paid thousands for the required accreditation to be part of the scheme.
Such an unreliable policy framework undermines confidence in business investment and hinders the growth of the supply chains and new markets needed to develop the zero carbon economy of the future.
Establishing a politically independent committee which had the freedom to design and implement long-term energy policy without the uncertainty of election cycles would provide the consistency required to achieve real change.
A recent study by Carbon Brief concluded that climate policies which were scrapped by David Cameron’s government have added £2.5 billion to energy bills over the last decade.
With greater certainty in the policy framework, businesses would be able to design long-term strategies and have the confidence to make investments without worrying if subsidies, regulations or grants are going to change unexpectedly.
In the long run, this will accelerate the transition to a zero-carbon, decentralised energy infrastructure which ultimately will drive down bills and create a stable home-grown energy market.
Conclusions
It is imperative that Government takes immediate action to limit the impact of the massive price hikes coming in April and October.
These should include increasing the value of the Warm Home Discount and expanding the number of people who are eligible for it, in addition to better targeting of the Winter Fuel Payment to focus support on those who really need it.
However, it is vital that policy-makers do not allow the current short-term crisis to jeopardise the journey toward a fully decarbonised energy supply.
We must introduce initiatives which accelerate the take up of renewable energy generation and improve the energy efficiency of our buildings and workplaces.
We must make fossil fuels increasingly expensive whilst ensuring that low-income households who currently rely on them are not faced with unaffordable energy costs.
And we must clearly communicate the benefits of the green energy transition so that the public are fully on board. We know that renewables offer not only the cheapest form of new energy but also the best option for our planet.
Change is never easy, but the long-term goal of warm efficient buildings powered by 100% renewable energy is the best possible response to our current energy woes.
Sources
https://www.mirror.co.uk/money/vat-energy-bills-must-scrapped-25854695
https://www.theguardian.com/business/2021/dec/08/uk-tax-breaks-for-oil-and-gas-under-scrutiny-from-climate-activists
https://www.current-news.co.uk/news/government-must-take-action-to-avoid-cost-of-living-catastrophe-as-6-3m-households-face-fuel-stress
2 Comments
Jan · 31/01/2022 at 15:40
very useful summary of where we are and what could be done about it. The issue of longer-term planning is obviously key. If only the government were disposed to listen….
helen · 18/10/2022 at 08:40
One of the best solutions would be to make ‘normal’ household energy consumption cheap and capped. Any energy used over the ‘normal’ amount should be very expensive. This encourages a reduction in energy use, supports the vulnerable and penalises those who use the most energy whilst maintaining a reasonable profit margin for the energy companies.