Liz Truss’ stubbornness also means energy problems
Liz Truss’ action on energy prices was one of her few political successes. Unfortunately, the Prime Minister’s stubbornness seems to have made it more expensive than necessary.
Despite shifts elsewhere, the government has stood firm on two points so far, refusing to agree to a higher windfall tax for oil and gas producers or telling consumers to reduce their energy consumption. .
Resistance on the first point is likely partly due to a desire to draw dividing lines with Labour, which supported a larger short-term tax on excess profits, as well as ideology. But industry resistance does not appear to be as strong as that of the Conservatives. Despite not advocating for higher oil and gas levies, Shell boss Ben van Beurden admitted this week that taxes on industry were ‘inevitable’ to help the poorest .
It’s unclear how much an extended windfall tax might yield. But former Clifford Chance tax partner Dan Neidle argued last month that the way former Chancellor Rishi Sunak had structured the energy profit tax announced in May left at least £5billion on the table. It is a quirk of conservative party politics that action against nuclear and renewable generators seems more palatable.
Getting consumers to keep demand should be much less controversial. But not only has the government shown a lack of sustained ambition on energy efficiency, it has been silent for too long on what consumers can do to ease the pressure ahead. This is all the more untenable as energy watchdog Ofgem this week acknowledged what the rest of the industry already believed: there is a “significant risk” of a gas shortage this winter and a chance that Britain is entering a “gas supply emergency”.
No one believes that breakdowns are the most likely outcome. Preparations and testing take place behind the scenes. But they can still be a risk during a winter when gas supplies are hard to predict and plenty more could go wrong. If the government is betting that the winter is mild and windy enough that there are no supply problems, it can pay off, as Adam Bell of energy consultancy Stonehaven notes. But that may not be the case. And if not, that’s when it’s worth warning consumers ahead of time to avoid panic, says Daniel Newport of the Tony Blair Institute.
Other countries have done just that. Ireland launched a national information campaign “Reduce your consumption” a few months ago. Germany has focused on inducing industry to reduce its consumption. California has adapted an alert system more commonly used to warn of wildfires to send text messages to consumers asking them to save energy when power outages threaten. It worked. UK demand management initiatives to date – such as a trial with Octopus Energy customers to incentivize them to shift demand to off-peak hours and a new ‘demand flexibility service’ underway development by the National Grid Electricity System Operator – have been more limited.
Back when Britain shunned a sensible conversation about cutting energy use, the question of demand has changed, says Newport. It’s no longer about trying to get everyone to use a little less energy to cut costs during the winter. Instead, the priority is how to deal with critical points during cold spells when there may not be enough energy for everyone.
The best thing (barring even earlier action) would have been to make reducing energy consumption a quid pro quo when the government announced its support for households. One of the consequences of unit price caps for consumers is that it has blunted the incentives of high prices to reduce demand. But the government has not reached this agreement with households and faces a higher bill for its energy price guarantee system. Worse, since then, the Truss government has lost so much political capital that it might find such a message harder to get across.
Truss’s resistance to an extension of the windfall tax is understandable even though it would help solve his government’s fiscal problem. The Conservatives’ silence so far on energy conservation is not. Part of the problem with last month’s “mini” budget was not “rolling the field.” Truss’ young government may have made the same mistake twice.
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