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New Thinking.

What has the energy price cap got to do with the climate?

The move to net zero is contributing to rising bills, but should ultimately also help lower them.

By Jonny Ball

This article was originally written as a weekly newsletter for subscribers to the Green Transition. To see previous newsletters and subscribe, click here.

Today, 25 August, the UK’s energy regulator Ofgem has announced its new price cap. It has come down, somewhat, but we shouldn’t crack open that Friday prosecco just yet. The reduction is a modest £151 per year, standing at a £1,923 annual payment for an average household, down from the previous £2,074. The average household is still paying a lot more to keep the lights on than it was a couple of years ago – double the amount, in fact. Especially for this coming winter, when households won’t be receiving the £400 support payments from government (which were paid out in instalments last year).

The government’s energy price guarantee (which subsidised high energy bills – and energy providers’ dividends – to protect consumer pockets when rising costs threatened to blow the price cap out of the water) currently stands at £3,000 and is still in place. But wholesale energy costs have reduced considerably from the dizzying heights we saw at last year’s peak, which prompted the guarantee subsidy.

The first spike came as demand shot up when the world emerged from Covid lockdown. That was compounded by the invasion of Ukraine and much of Europe being cut off from trade links with the belligerent Russia, which just so happens to be one of the world’s biggest energy exporters. If prices kick back above £3,000 this winter, the price guarantee will be reactivated, and the government will have to start subsidising households to the tune of billions, again. (Since all this talk of price caps and guarantees is pretty confusing, for those that missed it we have this handy Research Brief from last week, looking into proposals from the free-market Centre for Policy Studies to abolish the price cap entirely.)

So what does this all have to do with the green transition of the economy?

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Well, Cornwall Insight, an energy market consultancy with a strong record on price predictions, has forecast that energy costs won’t come back down to their 2021 levels – £69 per megawatt hour – until the late 2030s. That’s years of long-term inflationary pressure, because energy costs indirectly feed into the price of more or less everything in the world. Cornwall’s GB Power Market Outlook says that along with global geopolitical stand-offs, the move towards electrification in heating and transportation – that’s heatpumps and electric vehicles – will keep demand for electricity high for a while, and our expensive foreign gas dependence will continue for a bit, too. So, transitioning away from combustion engines and gas boilers – a major part of the green transition, of course – is adding pressure to a stretched grid and contributing to higher demand and therefore, while we’re relying on pricey fossil fuel imports, higher prices.

[See also: New guidelines on enforced prepayment meters fail to protect the most vulnerable]

There are different schools of thought about how to mitigate this. The government line seems to be, “Drill, baby, drill!” Well, not quite. But it’s approving new oil and gas licences, even though this will have extremely negligible/no effect on household energy prices, which are set at world market rates.

Keir Starmer has got into a bit of trouble in some quarters for saying Labour would honour existing licences to drill in the North Sea. But the opposition does also say that it would stop new licensing once it enters office, and that going hell for leather on renewables is the best way forward. A Labour aide told New Statesman Spotlight this “proves the central dividing line between Labour and the Tories”. Namely, “do we make ourselves more dependent on fossil fuels as a country, or do we move away from fossil fuels?” They said the Office for Budget Responsibility recognises oil and gas dependency as a key factor in upping our exposure to global market volatility.

Labour wants to make the UK a “clean energy superpower” with “shovels in the ground and cranes in the sky”. The “Green prosperity plan” will, the aide said, take up to £1,400 off household bills and create “over a million jobs” in those industrial heartlands we hear so much about. Part of that will involve a publicly owned GB Energy company, and a national wealth fund to invest in “gigafactories, clean steel plants, renewable-ready ports, green hydrogen and energy storage”. It all sounds great – you can read more here – and we can all sit back and relax.

There is a very large “but”, however. All of this needs to be done within Labour’s fiscal rules – which long-time readers will know means a Labour government will not borrow for day-to-day spending, and that they must see debt fall as a percentage of GDP by the end of a five-year parliament. That’s no mean feat. About 10 per cent of government spending is currently going towards servicing the national debt, one of the highest repayments in the developed world. But reducing it will require growth beyond the averages we’ve seen in recent years. That’s why many are sceptical of Labour’s ability to actually deliver on a British version of the Inflation Reduction Act in the US, or “securonomics”, as Rachel Reeves prefers. 

The staffer said they’re confident this can be achieved: “Setting up GB Energy, investing in local power projects across the country, clean power by 2030, the warm homes plan – we can do all of those things, even with having to phase in the implementation of the £28bn [green prosperity plan]”.

For the planet’s sake, and for our household bills’ sake, let’s hope that good ol’ boost to GDP materialises, and we can “phase in” and ramp up green investment quickly.

This article was originally published on the Green Transition newsletter. To see previous editions and subscribe, click here.

[See also: Energy company profits show where the real money is being made]

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