On the day Liz Truss became Prime Minister numerous lobby journalists “exclusively” revealed her plan to solve the energy crisis. The problem is each of the plans was different. In one Truss spends £75bn to recompense the energy retailers for capping prices, in another she forces consumers to pay the price by taking out long-term loans, in a third she funds it all through government borrowing.
We’ll find out soon enough. What’s certain is that the energy market – a state-created Frankenstein designed to featherbed supply companies that should never have been privatised – will soon be defunct.
Once the government starts fixing the wholesale price of energy, bailing out the middlemen and capping the price paid by consumers – not just households but pubs, launderettes and private care homes – all talk of “market forces” will be fictional. That’s because there is no market solution to this crisis, just as there is no market solution to a tsunami. Prices are rocketing because energy is scarce. Energy is scarce because Vladimir Putin switched off the gas supply. We’re in an energy war and we’ve run out of peacetime options.
The Tories may not say this out loud but their actions show they are beginning to realise it. To keep the lights on, incentivise nuclear and renewable power and keep energy prices below those dictated by supply and demand, intervention is needed to counteract market forces.
Labour, it seems, has won the first two rounds of the political debate. First by forcing Rishi Sunak to introduce a windfall tax as chancellor and now by bouncing Truss into a price freeze on household energy bills. These victories, though symbolic, contain important political substance. It’s not just that Labour was ahead of the game. The price freeze plan announced by Keir Starmer and Rachel Reeves, the shadow chancellor, was clear, simple and based on universalist principles.
Under Labour’s plan, everybody benefits from the price cap – not just the poor. That is not just an act of social solidarity. It is based on the recognition that a universal price cap would wipe three or four points off inflation, and thus make a dent in the cost of borrowing.
Though most voters don’t understand the intricacies, they can see that, under Labour, their energy bill would be frozen and that the oil and gas giants would pay the price through the withdrawal of tax loopholes designed by Sunak. It was, in short, good politics and good economics. Now the challenge is to fight for these principles in the debate over the bigger and more comprehensive energy package that Truss is said to be working on.
To cap household energy bills at an average of £2,500 a year for two years, as Truss allies have briefed, would cost an estimated £75bn, but households only use 40 per cent of the energy consumed in Britain. If you include factories, small businesses, hospitals, care homes and schools the price rises to £188bn.
The only question is: who should pay and when? The blunt options are: workers or capitalists, either now or in the future. There are only two final destinations for all the value measured in one year’s GDP: wages and profits. Real wages are now set to fall at the fastest rate since comparable records began. Profits, meanwhile, are soaring. Left to market forces this crisis would generate one of the biggest acts of upward redistribution in history.
Obviously it’s a socialist principle that the costs of imposing an energy price cap should be borne by corporate investors, through higher taxes and loss of dividends, not workers through higher taxes, public service cuts and falling real wages. And even moderate social democrats such as Starmer and Reeves believe in that principle.
What’s not obvious – yet – is that even the Conservatives are going to have to abide by this principle. The Tory instinct is to make workers pay for every crisis in real time, through wage cuts, tax rises and public service cuts. But it’s starting to dawn on the free-market right that if you bankrupt households you bankrupt mortgage lenders and, in turn, the hedge funds whose bosses frequent the Mayfair clubs where all the “Fizz with Liz” events were held.
So not only Britain but the whole of European capitalism is facing the spectre of price controls, windfall taxes and even nationalisation. This is why Allister Heath, the editor of the Sunday Telegraph, warned last week that Russia’s energy war “is pushing Europe and the UK towards economic meltdown and socialism”. Meanwhile, Izabella Kaminska, a veteran financial journalist who runs the newsletter the Blind Spot, told subscribers: “What I don’t understand is why markets remain so calm vis-a-vis the prospect of the bulk of the European capitalist system being nationalised. Instead of a ‘right to buy’, distressed homeowners and business owners will likely be given a ‘right to sell’ their assets to the government.”
In short, the most far-sighted supporters of free-market capitalism know that this is not just some blip but the moment when all the vanities of the free-market era will go up in a bonfire of state intervention. Forcing workers, small businesses and consumers to absorb the cost of the energy crisis would crash the economy. That’s why all the proposals emanating from the Truss camp are about handing the bill to the taxpayers of the future.
One option, suggested by the Tory right, is for the government to take out a loan, as in wartime, and hand the money – say, £75bn – straight to the energy companies to compensate for their losses due to the price cap. Another option Truss seems to be mulling is to force consumers, effectively, to take out the loan themselves, saddling every household in Britain with a student debt-like obligation lasting decades.
Labour’s response has to begin from principles: first that price caps should be universal, with any targeted help for the poorest households coming in addition to that. Second that any bailouts of the private sector come at the price of a government stake, or full public ownership. Third that the outcome of any intervention is redistribution from the rich to the rest.
On top of this, what must not be abandoned are the long-term changes to energy production and use that will end our dependence on fossil fuels and on the totalitarian states where they are produced. Facing an energy-induced recession it should be easy for Labour to advocate the following: a 95 per cent windfall tax on oil and gas profits to fund the price cap, plus increased borrowing to meet any shortfall and fund investment in nuclear power and home insulation.
However, as I have argued before, we will need a structural change in ownership and control, starting with the UK licences of the oil and gas producers. The government should take a “golden share” in every major player in the UK’s North Sea oil and gas fields, and use that decision-making power to detach the domestic wholesale price from the global price.
That would directly subsidise everything else in the system, from Centrica to your local pub and your household electricity bill. It would be just and logical, then, to nationalise the retailers and the National Grid.
It might all leave investors claiming they’d been “expropriated” and seeking compensation under international law. If so, they’d be part of a long queue, because this is what’s going to happen across Europe and beyond as long as Putin holds the West to ransom over gas.
[See also: Is this the energy industry’s “Lehman moment”?]