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UK Energy Crisis - Updated Blog on the Fuel & Energy Crisis

Graham Watson

23rd January 2022

In this blog we will be updating on some of the key issues and government policy responses as the energy crisis in the UK unfolds.

Five leading business groups have written to the Chancellor asking him to intervene in the energy crisis, otherwise they are going to face significantly higher costs. It will be interesting to see how this plays out - inflation is certainly on the rise!

Payback from renewables might cut energy bills

Good news here as regard electricity generation, with renewable energy apparently likely to be in a position to cut household bills by £27 by the end of winter as a result of a payback as a result of energy prices rising above subsidy levels.

However, whilst this is welcome, The body responsible for managing renewable energy payments, the Low Carbon Contracts Company (LCCC) have pointed out that a faster roll out of renewables would have seen an even bigger payout.

Risks of extreme fuel poverty

The Joseph Rowntree Foundation is suggesting here that some households will end up spending close to 50% of their incomes on fuel as a result of the 40% + price rises predicted for April. Remember, the definition of fuel poverty is a situation where households spend 10% or more of their income on fuel.

More generally, they believe that a growing number of children and pensioners are living in poverty, although the government, of course, denies this, much in the same way that the Prime Minister has denied being at any parties, or being aware of any parties and so on...

Fuel stress will rise

The Resolution Foundation's latest research suggests that the number of households experiencing fuel poverty - and spending 10% of their income on fuel - is set to triple in April, to 6.3m.

If correct, this represents a remarkable figure - and is perhaps indicative of the fact that the operation of energy markets is biased against the consumer in favour of energy suppliers and their shareholders.

How to smooth over the energy price shock

In this article, Faisal Iqbal is mainly looking at the macroeconomic implications for government spending in trying to smooth out the expected rise in energy prices in April. Households are likely to see the proportion of their incomes that they spend on energy to double.

Most analysts expect energy prices to rise by around 50%, but there's also an expectation that the government will somehow look to offset this. All of the usual suggestions are here - cutting VAT, removing environmental levies, and the possibility of some sort of 'cost deferral' mechanism with the government looking to either stagger price increases over 5 years, or with some form of upfront payment to offset the rising costs faced by energy suppliers.

The trade-off is about whether we want this to be short-term, or whether we're prepared to pay for this over 25 years. And, of course, the underlying problems with the market remain - not least a lack of storage facilities.

Options for the government explored

This Simon Jack piece for the BBC simply outlines the options available to the government to tackle the energy crisis.

These include suspending VAT on fuel or environmental levies, or extending the Warm Homes Discount available to the poorest in society.

However, it stops short of more fundamental reforms looking at altering market structure, or thinking about the ownership of energy suppliers.

This Guardian editorial focuses on the implications of rising fuel prices for the poorest in society, and argue that there's a need for government intervention to protect the most vulnerable.

What appears to be obvious is that the next few months are going to see a rise in fuel poverty, and the government really needs to decide how to plot a way forward and reset the market. With so many suppliers having left, there is limited to no competition at present, and in the longer-term that is likely to be damaging to consumer interests.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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