Energy crisis

This is the follow-up post to my previous one a few weeks ago. The reason for the delay is that I’ve been waiting for the details on the package and that had to wait for the mourning period to finish for the Queen.

So for any of you interested in how it works in the UK this is it. A bit of background first.

In the UK the price of domestic energy is determined by a price cap. The price cap mechanism determines the maximum price that can be set by the energy suppliers. It was an idea cooked up by the labour party in opposition, rubbished by the Tories as socialism, then nicked and adapted. It was introduced after a chorus of complaints that the companies were very quick to raise prices when the wholesale price of gas (and it was gas basically) went up, but slow to lower prices when the gas price fell. Until recently this was set every six months by the regulator (OFGEM). There was still a suspicion until last winter they were soft on the energy companies and it was working against customers, but there’s no doubt since the beginning of the year (if not before) its worked in the customers favour.

Clearly as outlined in the last blog there were a number of options as far as limiting prices were concerned. The one that the government has chosen is to cap the prices that can be charged (sort of). So the cap has been raised by about 25%. However we’re getting a £400 payment this winter which limits the rise with the £50 loan we got (to be paid through future bills) it just about fixes the cap for this winter to the last cap from the spring (£1972). The money to do all this (£89 billion) is being borrowed. Those on low incomes get additional support.

The plus points;

  • Its simple since its not targeted. You just get credit on your bill.
  • It limits prices.
  • There is a price signal since the unit prices have risen by about 25% (gas), slightly less for electricity, which should aid saving and energy efficiency measures.
  • The green levy is being paid by the taxpayer.
  • VAT is still paid on energy at 5%.

The problems;

  • The cap doesn’t account for the price rise in the spring. This was 30%.
  • The cap lasts two years for domestic users but six months for business users (this includes charities and community groups). This has a number of implications. First; what happens to get us off the government subsidising bills? The problem is other countries have found withdrawing subsidy in these situations is not so easy. The second big problem is what happens if the gas price soars? It’ll cost more. So the taxpayer will end up with more debt. Every time the price drops Putin blows something up and even if the war ends its unlikely he’ll turn the taps on.
  • What happens for businesses at the end of the end of the six months? At the moment this is unclear. It should be noted that the energy consumption of businesses is about the same as households.
  • Another problem is what if you choose to, or have to use lots of energy? Remember how this works is the government is paying the difference between the cap and the real price of energy (a considerable sum). My calculations suggest that particularly for gas £400 is not going to go very far – especially if this is a cold winter. This has two paradoxical implications. If you are rich and don’t care then you’ll be bumping up the national debt. If you are poor or have an underlying health condition you’ll also have to use loads, but then find £400 is not that much, with gas at 10.3p/unit and increase the national debt.
  • A whole series of scams are taking place. The credit will be added to your bill automatically you do not need to send your bank details to anyone.

In my view this scheme is only viable for the next two years if things go well (i.e. gas prices drop quite a long way). It would be better to have a more targeted scheme where people who can afford it take the hit and everyone else gets help of some type.

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