I have tweeted this thread this morning:
Those close to the government appear to be realising that UK households have no chance of surviving the coming winter with fuel bills forecast to rise to £4,000 or more a year. But the plan they're looking at is dire. A thread....
According to the FT, Scottish Power has proposed capping household energy bills at about £2,000 a year. Other energy companies apparently agree and Kwasi Kwarteng - expected to be Chancellor soon - is interested.
However, as the FT also notes, under the plan 'energy companies would cover the gap between the cap and the wholesale price of gas and electricity by borrowing from a “deficit fund”, arranged by the government through commercial banks.'
That loan would then be paid off through taxation, or by increasing energy bills for 10 to 15 years, or some mix of the two. So, all we are in fact back to is a borrowing arrangement forcibly imposed on the country to bail out energy companies whose businesses have failed.
And let's be clear about this: these companies have failed businesses. If the product they want to supply can only be delivered at a price that people cannot and will not pay because they will not have the means to do so then these companies are bust.
But note what this scheme does. Its whole intention is to keep the energy companies afloat, with this government-backed loan to be paid off by tax or increased prices over years to come providing the means to ensure that happens.
In other words, this scheme is only indirectly designed to help households. Instead, its whole purpose is to keep the energy companies afloat. It is, to not put too fine a point on it, the most massive bung to a failed privatisation exercise in that case.
The estimated cost - at about £100 billion is right. I estimated the cost at £44 billion a year for at least two years in my plan, entitled 'Surviving 2023', but price forecasts have gone up since then.
The focus is wrong though: setting a price cap of £1,971 does not help families on the lowest incomes who cannot already afford this price. That the focus is on the cap alone shows that this plan is putting its attention in the wrong place.
More worryingly though, as I explain in 'Surviving 2023', helping households is only a relatively small part of the cost of getting through the winter to come.
Businesses, charities, care homes, and services like schools and the NHS all need massive support to survive. There is nothing in this plan to help them or stop the economic crisis their failure will create.
As a result, it's very clear that this plan cannot work: in fact it won't even save these energy companies because they can still go under if their business customers fail through their inability to pay uncapped price increases. They do not seem to understand that.
So, this plan will not save the failed privatised electricity companies, or the economy, or many households, but will give a £100 billion bung to these companies despite that. It's dire as a result.
What should happen? Most of the answers are already in 'Surviving 2023'. And as I make clear there, if these companies are bust - and they are - they need to be told to hand over their businesses now because that is what bankrupt businesses do.
We should not be in the business of saving failed energy companies this winter. We should be in the business of saving people, public services and the economy at large. That is the task of government now.
Given that the energy companies have admitted they can't survive without state support then the only thing to do is tell them they will be nationalised now, without compensation because bust businesses are worthless, and that this is necessary to guarantee continuity of supply.
Doing anything else with public money at this moment makes literally no sense at all, and would be throwing £100 billion of state funding away, with a long-term cost to us all.
But will our government to come act in the public interest and pursue this nationalisation instead of putting in place an arrangement that supports their failed dogma of privatisation and the banks who will make a killing from this? I very much doubt it.
This is a scandal in the making.
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Terrifying read.
The Tories sinking the country in a hole, lower and lower as they go.
I’ll be at the (rejoin) protest 10/9, coming from Spain. My message will be to GTTO. We know it won’t achieve much. But it’s good for the soul.
I care deeply.
Very well articulated.
The only way out provided by the market is for someone else to benefit.
The utility problem is just too big for the private sector to deal with.
It is a national emergency, no doubt about that. Our energy supplies are not ‘secure’.
The utility companies want their cake and to eat it too. It’s just a more slo-mo version of what is to happen that they are proposing. As if they have the Government over a barrel.
But in reality it is the Government that with its ideology has got itself over a barrel with its refusal to invest in Green, better insulation and stuff like that. As well as a reluctance to put its hand in its pocket and take control of an out of control market.
Perhaps I am naive, but, as I understand it the only role of the energy companies is to buy energy and sell it. As part of their buying energy role, should they not be demanding lower prices from the energy producers, who are making huge profits? I fully accept that the reselling companies are likely to go bust, but they appear only to be looking at the price they can charge for their product in order to avoid that. Isn’t it time they looked at the price they pay?
See Clive’s comment
And previous ones from Mike Parr
You have got to give to the energy companies asking for £100bn , pretending it’s for ‘the people’. Theycan do that up front, confidenct that no poitical party will call their bluff, and tell them that their profit making model doesnt work and they have to go bust and/or revert to public ownership.
During WW2 the Soviets responded to the Nazi invasion by moving whole factories from the west to safety in the east in just a few months.
Nationalise then adopt a “war” emergency response to build renewable capacity, storage and resilience to shocks. And provide energy at prices everyone can afford.
This plan is exactly as you describe – a bung to energy supply companies. My fear is that it will gain traction because the end result is a cap on household bills that will be popular…. despite its manifest failings.
Nationalising suppliers is pretty easy as all they do is invoice clients – they are not in the business of doing anything useful like actually generating/supplying power. So….
1) Introduce a new set of tariffs via Bulb (which should be ‘properly” nationalised). These should be tiered to deliver ordinary/low users with affordable energy whilst requiring heavy users to “pay their way”. It should also consider special tariffs for schools, hospitals etc. and sensible tariffs for ordinary businesses. (Yes, I know there are poor, high energy users but they must be supported in another way).
2) Sit back and wait for the “big switch” to happen.
a) Suppliers that are not vertically integrated will not be able to compete so will just wither away (although there will have to be some method to prevent “non switchers” being ripped off – maybe a cap set at the Bulb price +10%??)
b) Vertically integrated suppliers will have a choice – compete or stop. Either they supply the energy that they generate at a sensible price and give up windfall profits or they stop supply and sell what they generate on the open market.
3) As (virtually) the only buyer of energy from generators we may see the tables turned as government will have considerably more leverage when buying. If that happens this scheme may not be as costly as it might first appear.
The beauty of this strategy is that the government already owns a supply company that can be ramped up. Also, there is no compulsory nationalisation so no question of compensation. Finally, a monopoly buyer of energy might make the ‘(non) market’ work for us. Of course, there will be legal challenges but a direct Act of Parliament could take care of this.
Very subversive
Option 1 would seem to be a good way to go.
But where is a nationalised Bulb getting its gas? From the upstream companies at global prices. So the state would be providing the same ‘bung’ but directly to the upstream companies rather than indirectly via the supplier companies.
Local UK producers who produce some 50% of UK energy needs could have their windfall profits taxed away. But the payment of high prices to international gas producers would require a large transfers of income abroad. Those income transfers should presumably come from those most able to pay via higher taxation.
Read what Mike Parr has had to say
It’s not perfect but it is an improvement from where we are and is pretty easy to execute.
As a nation, there is little we can do in the short run about imported gas prices. Bulb will be making losses that will have to be covered out of general government expenditure. However, longer term, Bulb can be used to influence behaviour. Until now, “the more you sell, the more profit you make” has been the mantra of suppliers; with Bulb, energy conservation could be rewarded; switching to electricity, too (as renewables are built out) etc..
In short, energy supply and use could be managed more rationally from a national perspective.
Agreed
Clive you’ve got the job!
Please initiate immediately.
Wholly agree with the sentiments including the approach suggested by Mike Parr.
As someone who has worked in the energy sector (nuclear, conventional power, renewables and oil & gas production) for many years, I think the description in todays Guardian describing the oil industry as an illegal racket and a profiteers paradise sums up the situation very well. To illustrate, the average North Sea operating cost per barrel is c.£11.20 and Saudi is typically less than $3 per barrel…it doesn’t need over $100 per barrel to make a profit.
The calculation applied using gas prices is fundamentally flawed and could be easily changed (as illustrated by Mike Parr). The failure to do so can only be described as deliberately calculating from a political or big industry perspective or utterly incompetent.
I wholly agree with the core of what you posit, Richard. Simply if customers cannot afford the service afforded by by the energy suppliers they should be nationalised or allowed to go bust…they certainly should NOT be bailed out by the country and if they require this they should simply be nationalised.
We need a quick solution (unlikely with the current zombie government). I have a simple suggestion that would encourage greener behaviour and correlate to usage and ability to pay. I won’t use actual figures but will try to illustrate with ‘round numbers’. Let’s say the average UK family home uses 1000 units of electricity and a small home 500. And, let’s say, that above 2500 units would be deemed as the beginning of what might be termed high usage. It would not be difficult to establish a set of rates per band (e.g., 500-750, 750-1000, etc.) that started with a low, affordable rate and an increasing rate as you moved up the bands and at a band above the 2500 units (i.e., high usage) the rate was applied for all units used (similar to the cap applied in personal taxation in terms of the tax-free allowance, i.e., above just over 125k you lose the tax-free allowance). Literally this could be done on a spreadsheet in a day with the rates being charged being correlated to an approximate percentage of income recognising that energy usage is only a proxy for income / ability to pay, i.e., it is not truly accurate…but could be calculated and implemented quickly. This would require an initial bit of thought as to what percentage of income would be deemed appropriate as the cost of energy particularly at the lower usage / income end of the scale. The national living (?) wage for a 40 hour week is c.£19,760. Assuming 5% is deemed to be the acceptable percentage of income spent on energy then the total energy bill for a person using up to say 750 units (in my rounded number example) would be £988…or 1.32p per unit. 750-1000 might be 1.5p and so on. At above the high usage level the rate would be applied to ALL units used.
In addition to being easy to calculate and implement – and arguably a fairer basis for energy charges – it may encourage insulation of homes, considered energy usage and possibly discourage pensioners sitting in large homes to ‘pass on the inheritance’ to sell, etc.
In summary, there is no good reason why energy costs are so high (oil prices above c.$40 per barrel are not necessary as there is no overall shortage of oil or gas and any apparent shortage is deliberately created by the oil cartel to boost prices), the current calculation used is fundamentally flawed (and inappropriate) and does not properly account for nuclear or renewable energy sources. Critically, fair and appropriate action is needed now! Possibly a refined version of the above offers a viable approach? However, I won’t hold my breath as it requires political will to set aside the narrow, self interests of the energy industry and actually do what the government should do and act in the interests of the people of the country with an emphasis on fairness and looking after those who most need support.
I agree with your solution
Indeed, I propose it in ‘Surviving 2023’
Apologies for the broken record.
Wholesale elec prices are around £500/MWh. Splitting the market into gas (marginal pricing) and the rest – fixed (nuke, PV, wind, biomass) would reduce this £500/MWh (depending on output of nuke etc) by around half – sometimes more. This would be an immediate relief.
In the case of gas, one could have a hybrid price – £20/MWh for the North Sea/Irish sea stuff and market for the rest. This would probably drive gas prices down to sub-£100/MWh – which if used for elec gen would mean a £200/MWh marginal price – and a composite elec price heading back to £70 – £90/MWh – not far off normal.
These are all rough figures – but in the right ball park.
I am not surpised that none of this is happening, why would it with a tory-vulture gov, a supine Liebore opposition and ditto the Lying Dems.
UK Politics & UK politicians are failing to deliver. I am so not surpised.
Thanks Mike
I may blog this
Please so blog on Mike’s point Richard.
People are waking up and discussing.
Also this has generated lots of discussion https://twitter.com/DrSimEvans/status/1562433136025550848?s=20&t=-WH6zNKZ0r6UmhfivMsx5g
Neo -liberalism defined:
‘socialism for the rich, capitalism for the poor’
What is abundantly clear is the actions of the government are to protect energy companies profits.
From the 5p tax cut on fuel duty given to support those companies, not people (as it was spun by the BBC and others) to these myriad wheezes to suggest anything but nationalising and having an energy company as a service rather than profit driven machine.
Also, kind of getting fed up with energy bosses getting media soundbites telling the government more help is needed. This is purely about protecting their already gargantuan profits, they couldn’t care about customers. Ultimately what would they rather have, millions of customers unable to pay and lots of court costs pursuing debt or receiving free Government money guaranteed ?
The spin on this and lack of questioning from the media is atrocious
Quick question Richard,
Fundamentally, is this the energy equivalent of the banks ‘too big to fail’ ?
They can fail and be taken into the public sector tomorrow
The banks that failed continued to operate
So could energy
Northern Rock was completely nationalised; RBS was taken almost entirely into public ownership, Lloyds substantially so. Other banks stayed out of public ownership but let’s be clear, without government support for the system ALL UK banks would have failed – the idea that through their own brilliance/hard work some came through the crisis is nonsense and, as a consequence, they all owe us. Let’s not forget that when we think about regulating/taxing banks.
Sure, there were lots of things that could have been done better at the moment of real crisis (Fred Goodwin’s pension perhaps being emblematic)… but hindsight is always 20-20.
The real lost opportunity was, in my view, after the event when the Government found itself owning a large bank (RBS) that could have been used to change the financial landscape in the UK. Ideology and lack of vision prevented it.
I do see a parallel with the Energy market (although Bulb is small compared to RBS) and it would be criminal to not learn the lessons from 2008. Use Bulb to shape the Energy supply market!
It wasn’t just the UK Government that baled out UK banks. The US Government did too by massively supporting foreign banks with USD liquidity funnelled through the UK and across to Europe.
Hang about let’s not forget the ultimate beneficiary is the public who are getting their bills capped at affordable prices. Let’s also not forget that the greening consequences have largely dismantled out ability to produce gas domestically. So yes there is market failure caused by our dependency on Russia. This could not be avoided by a green new deal or by wind or solar as the science is nowhere near close to allowing us to store in the necessary scale. With all this mind why do you want to resort to political dogma. Yes the State is bailing out these companies but our dependency on Russian gas is the issue and our inability to produce domestically . This is the issue why not focus on that instead?
Actually, we are not dependent on Russia at all
And the required green technology can solve all the issues, at lower cost than other sources
We could also save masses of energy
I have been arguing all that since 2008
And you are talking nonsense
And if he thinks the current/proposed cap is ‘affordable’ for folk? Which folk?
Green gas, produced here.
https://www.ecotricity.co.uk/our-green-energy/green-gas
Erm………………………Jason – what do you think the quickest and more effective response will be.
Think about it.
I suspect that bills will not be capped at an “affordable price”. They will be capped at the maximum price regardless of how efficient a household is or not. Or within a narrow range.
Think of university fees which are the same whether you are studying at the university of Luton or a prestigious russell group uni.
Or affordable homes that are anything but.
It’s not clear to me that Labour’s plans are so different to what it being proposed by the suppliers. As I understand it Labour would be subsiding the suppliers also?
In capitalist economies changes in the price of a product are used to bring the supply of a product into line with the demand for a product. Using price to bring supply and demand into equilibrium always favours those with money since they can afford to pay the higher prices. They simply save a little less than they used to.
It’s good that Labour’s plan limits the role of price in determining who has access to energy.
I have previously said that Labour’s plans also make no sense
Energy is essential for a decent life, indeed essential for many to avoid dying, as is water, sanitation, the NHS, nutritious food…..These things are citizens’ rights in exchange for allowing a government control over many aspects of our lives all for the public good.
They should be provided free, or at a price affordable to the poorest and on a progressive scale for the better off. And not be priced to allow executives and shareholders to profit with no regard for the rest of us.
Does anyone know who the shadow energy minister is?
Believe it may be Ed Miliband
Miliband is climate change and net zero, but not necessarily energy, although the two overlap. Just found him talking about it on GMB. I’ve never seen him for ages. I wonder if the party would be better if they had him take over from Starmer.
Alan Whitehead, according to this: https://labour.org.uk/people/shadow-cabinet/
You have to scroll down to “Labour’s Full Frontbench” to find him, under Climate Change and Net Zero.
Has anyone heard of or seen Alan Whitehead before today? No wonder we don’t know labour’s stance on energy. He’s going to stand down at the next election, apparently.
Thinking about the govt doing in fact close on absolute sod-all, it is worth considering – though hardly happy thoughts – that the economy actually will tank next year; not just enter a serious and long-term recession, with rising poverty and unemployment and business closures, but tank. Such a circumstance does occur – usually (incorrectly) put as a country “going bankrupt” (countries can’t go bankrupt but their citizens can become unable to buy anything imported at all as the currency plummets on world markets). Such collapses are not uniform inside that country – some suffer far worse than others, some regions are badly hit and others only a little. Some horrendous individuals make killings out of it, even. But of course if the Daily Mail says it’s not a collapse, then a large number of people (journalists’ aping each other as they do) will believe that. Astonishingly, a couple of weeks ago a survey found that 8% of people thought prices (generally) would come down soon; and a further 12% that they would not go up (including energy prices) from what they currently are. Friday should be interesting.
Subsidising energy retailers so they can continue to make windfall profits is just corporate welfare. So much for the vaunted innovation and efficiencies of the market. I can see why the companies like the idea of a government safety net, but let’s nationalise the profits as well as the liabilities.
Forget about the so-called “market” price – what is the actual cost of generating the electricity we need, plus a reasonable return, say 10%?
Gas (and fuel oil, etc) are a little more difficult as we need to produce or buy the hydrocarbons.
See Mike Parr’s estimates
Nothing in the plan to save or reduce energy consumption like a massive scheme to fully insulate homes starting with the most energy inefficient ones or installing more efficient heating/ aircon systems. Think of what £100 billion could do in this case, although of course, the immediate financial disaster facing households does need immediate massive financial in put as well.
Is it part of market fundamentalism that whatever happens the business makes money? The banks must be wondering if setting up similiar buffers between themselves and the customer, as with the energy producer > retailer > customer, so they never need to worry about unpaid mortgages again.
This gives increased impetus to the Don’t Pay campaign. It is imperative that these companies are brought down and a crisis is precipitated forcing the government to act rather than witnessing a far more damaging slow motion collapse. We should crash them before they crush us.
Alas, I suspect the response to that campaign, will be to make the companies whole, and deduct the owed monies over time via PAYE, or benefit reductions
“make the companies whole”? What does that mean?
Can utility companies make PAYE or beenfit deductions without a court order?
Funny how the free market fundamentalists can discard their stridently pursued ideology in a trice when it suits their interests. Profit is in part the reward granted by the market for the various risks businesses assume by being players in that marketplace. One of those risks, is financial loss as a result of customers being unable to pay what they owe.
What effect would a relative normalisation of energy prices have on inflation?
They would help, significantly
Oh dear, looks like the IOM have fallen for the Corporate Welfare trick.
Will this be used as a Trojan Horse argument for the rest of us?
For those interested in the technicalities – the Greeks (yes the Greeks!) submitted what is called a non-paper at the July Energy council on electricity market reform. I am usually very critical of most papers. The paper is only 4 pages & converges with what me & my colleagues (& people within the European Commission) have been saying for some years. More importantly it “operationalises” the “let’s split the market & makes it very clear that this is not difficult to do, has very clear & immediate benefits & could be done in weeks. The paper has 12 points which could apply equally to the UK. They are reproduced below. Market reform is a rather simple data processing problem & in a meeting with the Commission yesterday, the view was that laws would not need to be changed to implement. & with respect to point 12 – I have done my own calculations – the 45% is realstic.
1. The resources that operate when available and not on demand submit volume-based offers in the day-ahead market (DAM), not economic bids. The volume-based offers reflect the best possible forecasts of their operation on the next day. With this offer they assume responsibility for the real-time operation, are subject to deviation costs and can participate in the intra-day and balancing markets.
2. For their volume-based offers in the DAM, these resources get remuneration depending on contracts for differences concluded with private third parties or the public sector, regardless of the DAM.
3. In case these resources declare no coverage by bilateral or public contracts for differences, they may participate in a non-mandatory pool (green power pool) operated by a public body (or a private body adequately empowered) acting as a single buyer and seller to load-serving entities and consumers.
4. The volume-based offers of these resources may correspond to bundled resources that may include storage and possibly an aggregation of RES plants.
5. The system operator (i.e. the TSO) scrutinizes the volume-based offers from the perspective of forecasting accuracy and system operation possibilities and may accept or curtail the volumes declared. The eventual curtailment follows pro-rata rules.
6. Next: the DAM considers that the accepted volumes of the above resources that operate when available and not on demand are must-take volumes. Thus, the market operator subtracts the accepted volumes from the load declarations. The remaining load (net load) corresponds to the demand that the on-demand resources must meet. Then, the resources submit combined economic and volume offers according to the same rules currently applied and the market is cleared with the same way it is cleared today.
7. The load-serving entities and consumers pay at market-clearing prices for the energy purchased in the net-load DAM. They may also buy from the green power pool, if this operates. They also have payment obligations in the context of CfDs which are independently concluded.
8. The above points describe a two-stage DAM: The first stage performs the acceptance and aggregation of the volume-based offers by the resources that operate when available and not on demand. The second stage performs market-clearing of the net load (after subtracting the accepted volumes from the load) using the bids of the on-demand resources.
9 The intra-day and balancing markets remain unchanged.
10 Although the participants submit bids at the bidding zones, the two-stage DAM performs directly at the level of the coupled markets. The market-clearing of the net load (i.e., second stage) takes into account the interconnection constraints. Thus, the algorithm may lead to different market-clearing prices of the second stage DAM in case of congestion.
11. Evidently, the suppliers and consumers pay the weighted sum of the remuneration of resources that operate when available and not on demand and the market-clearing price of meeting the net load using on-demand resources. The former reflects the total levelized costs of the resources that operate when available and not on demand. The latter corresponds to marginal cost pricing and may reflect natural gas prices.
12. Thus, if the first stage of the DAM corresponds, as today, roughly to two-thirds of electricity consumption and for example has an average cost of 80 EUR/MWh and the second stage of the DAM clears at 250 EUR/MWh reflecting gas generation costs, the consumer would pay (2/3 x 80)+(1/3×250)=137EUR/MWh, which is roughly 45% below the cost of electricity when applying the current market design.
Thanks
Whatever route we go down I suggest that some emergency mandatory energy saving measures are called for.
Lower speed limits
Tax/restrict flying
Bans/restriction on unnecessary energy use – lights being left on in closed buildings, ban on sale of thuings like private swimming pools/hot tubs/patio heaters/4×4’s etc
Too late there. Rishi Sunak has already built his private swimming pool, which will cost £13,000 a year to heat. But the public one in his constituency of Richmond is probably going to close because they can’t afford to keep it open. I have already suggested that they queue up outside his house with swimming togs and towels, a coach trip to get them there.
Thanks to Mike Parr for his enlightening comment. One question though. Im completely unclear over what control we have over the price we pay for North sea gas. Are the priducers at liberty to sell elsewhere if they choose or does the infrastructure only realistically allow distribution inthe UK?
.
We can change the law
In the face of a crisis we should
This is the power we vest bin parliament
“That loan would then be paid off through taxation, or by increasing energy bills for 10 to 15 years, or some mix of the two.”
Now, the current trick of the energy companies when it comes to the private companies that have failed is to put the additional increase on the standing charge element of the bill. This is what they are doing with the energy companies that have gone bust. We are all paying for their failure.
https://www.bbc.co.uk/news/business-60257448
Energy price cap standing charges will continue to include the cost of supplier failures, as Ofgem rules out changes.
https://www.moneysavingexpert.com/news/2022/08/ofgem-rules-out-shifting-the-costs-of-supplier-failure-out-of-th/
So, I imagine that if the Tories agree to this it will be on the standing charge part of our energy bills where it is fiddled from. The part of our bill that we have no choice but to pay regardless of use. I imagine that the standing charge part could easily hit £1000 per year in this scenario.
If they need these sort of bailouts then privatisation has clearly failed. The only answer is nationalisation.