Spark up the central heating and get the tumble dryer on: energy bills will fall by 7 per cent in July, when Ofgem will reduce its price cap by £129 a year for a typical household. This underlines why the cutting of the £200 Winter Fuel Allowance is such an odd point for Labour to be losing voters on. It had already lost 45 per cent of its value (in real terms) since it was introduced; most of the people receiving it didn’t need it; and its impact on bills is small compared to wholesale prices. By July, the price cap will be £2,559 lower than it was in January 2023.
On the other hand, our government can’t do much (in the short term) to change the wholesale price of energy, of which we are a net importer. This is why Keir Starmer has described the UK’s new agreement with the EU this week as “good for bills”: less friction on imports of food could mean lower food bills, and a new relationship on energy might mean lower energy bills. Although on this second point, things are less certain.
At first glance, the most impactful part of the agreement seems to be the commitment to “explore in detail” the idea that the UK could join the EU’s internal electricity market. There is a clear relationship to bills here: since we left the EU, we’ve been disconnected from its trading platforms. This caused some inefficiency when electricity was traded between the EU and the UK, which did lead to slightly higher energy prices for us (by about two per cent). So it seems that undoing this would have the opposite effect: our electrons would rejoin the EU, French and Dutch electrons would come here for a summer – it would all be very 2015 inside the wires.
The snag is that we have already been trying to make this happen for nearly five years. The Trade and Cooperation Agreement the UK signed in December 2020 contains a commitment to find a way for the UK to trade energy as if it was in the EU’s internal market. Efforts to make that happen have “failed spectacularly”, says Tom Edwards, principal modeller at the energy analyst Cornwall Insight.
The reason this has failed, says Edwards, is that the European energy market is highly interconnected; a central algorithm governs the way power flows across borders, and efficient scheduling of trades between countries is “basically impossible” without joining the algorithm. Can we just sign up to the European algorithm? “We can’t take part in that algorithm,” Edwards told me; one of its core principles is that it is limited to members of the internal market. “They’ll never agree to let us be part of it if we don’t agree to join the Customs Union.”
That sounds fairly unlikely. But as a consolation prize, we can definitely rejoin Europe’s Emissions Trading Scheme (ETS). An ETS is a means for companies which emit a lot of carbon to buy carbon credits from other people who remove carbon. (A bit like if you burned down a library, but also paid for a new one – it would be fine and no one would mind, right?)
The only issue here is that leaving the EU actually made carbon credits cheaper in the UK, which has traded carbon at a lower price than Europe for the last five years. Rejoining Europe’s ETS will mean European businesses can buy carbon credits from the UK again, which will push up the price of UK carbon credits. For a major emitter such as a gas power station, these credits are the second-biggest cost after fuel. This won’t necessarily mean higher bills – the energy industry is actually in favour of it, because they’re more worried about the extra costs of the EU’s new cross-border carbon tax, and their position is that a bigger, more efficient market for carbon should help sort this out.
Again, there is not a huge amount that politics alone can do about the price of energy in the short term. In the long term there is a great deal politics can do (stimulate the production of lots of cheap new energy). But the wholesale price will remain in charge.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: Inside the Conservative Party’s existential spiral]
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