The energy squeeze risk for Boris Johnson’s Tories
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Keeping the lights on, keeping food on the shelves and ensuring people can afford to heat their homes — any government that falls down on these most basic tasks will pay a big price at the ballot box. But taxpayers do not take kindly either to bailing out private companies, or being on the hook for their mistakes. That makes the natural gas squeeze and spike in energy prices fraught with risk for Boris Johnson’s Conservative government just as it strives to put the pandemic behind it.
On one level, Britain is a victim of its own success. Phasing out coal-fired power stations and encouraging investment in renewables helped the UK to cut carbon emissions faster than any other wealthy country in the past two decades. But it also made it more reliant on gas, especially when, as in recent weeks, the wind doesn’t blow.
The UK has also fallen victim to a market failure of the government and the regulator’s making. The drive to have new entrants challenge the “Big Six” energy groups, combined with a price cap idea stolen from Labour, has ended up with dozens of companies in trouble. Many are now locked into selling energy cheaper than they can buy it for, after failing to hedge properly against soaring wholesale prices.
The first priority must be to protect customers from failing suppliers. Kwasi Kwarteng, business secretary, is right to rule out any taxpayer bailout of suppliers that fail because of flawed business models and an inability to withstand price swings. Normally that would mean Ofgem, the regulator, finding healthy rivals to take on their customers. But the bigger energy companies insist they cannot afford to do this today within the government’s price cap without running up large losses.
So underwriting the cost of transferring these customers to rival suppliers through state-backed loans seems inevitable; collapses among suppliers reflect, after all, a regulatory failure in allowing undercapitalised businesses to make fixed-price contracts without sufficient hedging. Loans could be made repayable — potentially with a profit-linked surcharge — if the new customers become profitable over time, but they could also be written off if losses persist beyond a certain point.
The second task is to make the UK energy market more resilient in future. Tighter gas market regulation should follow, with stricter hedging requirements for suppliers. That need not mean a return to the old oligopoly. If it leads to a market with fewer suppliers than the 70 reached in 2018 but ensures competition between more robust players, consumers will gain.
Security matters, too. The UK needs more investment in gas storage where, after the closure of the Rough facility off the Yorkshire coast, Britain lags far behind EU counterparts. Renewable energy storage is also vital. Plans launched years ago to store power with pumped hydro projects and large-scale batteries need fresh momentum. A sorry history of schemes to insulate draughty homes must be replaced by effective action.
By maintaining the price cap and benefits such as its warm home discount, Kwarteng insists the government will ensure households can keep the heating on. But higher energy costs on top of broader price rises, removal of the universal credit uplift and a tax rise to fund social care could yet mushroom into a cost of living crisis. Johnson will next month seek to persuade the world at the COP26 to commit to tougher plans to cut emissions. He must also work out how to carry the country with him towards a net zero future which, as the gas squeeze has made everyone aware, could mean higher prices along the way.