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July 28, 2022updated 03 Aug 2022 9:30am

Price caps and politics: inside the UK’s energy cost crisis

UK consumers could pay up to $3,632 for energy heading into winter, leaving many facing a perilous shortfall. How did the country get here?

By Andrew Tunnicliffe

Europe continues to hold the unenviable title of being the epicentre of the global energy crisis. Not a week – even day – goes by that the headlines are not adorned with gas, petrol or power generation stories, leaving consumers, commercial and consumer, increasingly shaking in their boots.

They’re also leaving those among us with a desire to do the right thing, environmentally speaking, with a sense of foreboding. Coal is once again, somewhat incomprehensibly, back on the agenda. Just days after speculation mounted that Germany looked set to face energy rationing in coming months, the country’s Federal Minister for Economic Affairs and Climate Action Robert Habeck announced plans to counter dwindling natural gas supplies by reopening mothballed plants.

Meanwhile, France is rumoured to be considering nationalising Électricité de France (EDF) as it faces financial difficulties and growing concerns over its ageing nuclear plant estate. French consumers have been cautioned they face a difficult summer too, with already considerable strain on power supplies, highlighting struggles with European power infrastructure as a whole.

In the UK, both the Government and energy regulator Ofgem have taken steps to support costumers with rising energy costs, rather than trying to bring costs down by looking at alternative sources. As part of a £37bn ($44.8bn) package, 28 million households will receive a government grant of £400 ($484) to help pay energy bills, alongside a further £150 ($181.6) grant that will be paid as a reduction in local taxes.

An energy cost crisis born of inaction?

For Simon Tucker – global head of energy, utilities, and resources at Infosys Consulting – whilst the news is welcome, it’s been a long time coming, as has the crisis we face today.

“We haven’t had an energy strategy for the last 30 years,” he says, “because politics states that you look after today, not where we’ll be in 5 years’ time; you look after what voters right now.” This, he adds, is not the fault of one political party, one government, or one prime minister, it’s the result of a collective failure over decades.

For its part, Ofgem has been overseeing the markets with the aim of minimising the impact of rising wholesale prices. Since 2019, it has been implementing six-monthly price caps, restricting the amount customers should pay for their gas and electricity. However, the cap has faced criticism after its latest increase – which came into effect at the beginning of April – saw average costs rise by 54% or £693 ($839) a year to £1,971 ($2,386) a year.

The news was met with furore among consumers, consumer groups and charities. Many argued for the need to tax the biggest energy providers, those making substantial profits thanks to the market volatility. The likes of Exxon, Royal Dutch Shell, and BP were all singled out. As pressure mounted, UK Chancellor Rishi Sunak MP announced a new levy on oil and gas producers in the North Sea. However, his plan – estimated to raise around £5bn ($6bn)– failed to address further uncertainties.

Sunak left the door open to taxing electricity producers, a move opposition parties branded “haphazard”, warning the uncertainty would stifle investment. His opposition counterpart, Rachel Reeves MP, said: “It’s the hallmark of this chaotic, out-of-touch, out-of-ideas government that their hastily cobbled together plan is having this sort of impact on British businesses.”

What can power suppliers do against changing market conditions?

Tucker says that in the most part the sector, in particular energy suppliers, are already struggling with market conditions, a predicament not helped by the energy price cap. “If you look at it through the eyes of an E.ON or an EDF, they’ve ultimately been losing money,” he says.

Many of these are not in the position of being able to produce their own energy, rather they are purchasing in from the market themselves. As a result, the cap had to rise because the wholesale cost of gas was far higher than it was set at, a situation that could not continue as it would likely have threatened the UK’s energy security as the sector – for foreign stakeholders at least – edged towards not being financially viable.

At its inception the price cap was helpful to consumers and suppliers. It was, however, a very different world then; it was stable, supply and demand was predictable, and wholesale costs were largely constant. “The price cap mechanism kind of worked,” says Tucker. “Many of the energy companies were offering very good deals, well below the price cap, and consumers could shop around because there wasn’t that shock we’re seeing today.”

Today there’s what he calls a “perfect storm”. As the world was getting back to a version of normality after the worst of Covid, commercial demand was rising once more, but supply was already struggling to keep up. As February drew to a close, Russia’s invasion of Ukraine sent shockwaves across Europe’s energy sector, adding further uncertainty to the industry.

“We need to say ‘get your eye back on the ball'”

For Tucker, leaders have to lead. “It just feels there’s been no visionary politics in this country for the longest time,” he says. It seems there is no political will to make something happen. The proverbial can is kicked down the road through government reviews and committees which, when they do report, land on the desk of a new department secretary, new government and even new prime minister.

Tucker says it’s time for politicians to grasp the nettle and act. They need to look beyond Westminster – which has for too long been their only vista – and start to act in a meaningful way. He says politics is politics, but this country has been focused for far too long on whether someone had a lockdown party, to the detriment of our energy and food security.

“We’ve let them get away with [inaction],” he says. “We probably all need to write to our MPs and say ‘guys, get your eye back on the ball’. We need to move on, and quickly.”

There are things consumers can do too, such as reducing energy consumption, and manufacturers could also be investigating ways of making their production lines even most efficient. But placing the burden on private companies or individual consumers is unlikely to make a difference; ultimately it comes down to strategy and vision on a macro scale which, says Tucker, comes via a meaningful energy strategy from government, something that has been missing for years.

“Nobody has cracked – especially post the Russian and Ukrainian conflict – the solution to give everybody energy, cheaply,” he says. “Some countries, for example the Nordics, are pretty far ahead. You could say France too, with its nuclear strategy and interconnectors it is building into Africa for solar. Germany has also got a very good energy network.” But in the UK, he says, we are at the mercy of the markets.

He believes that whilst there has been some good done – notably Hinkley Point C and the expected government backing for Sizewell C – the lack of political appetite to truly tackle the issue of energy security will impact us all, for years to come, if it is not addressed. He considers other infrastructure projects that don’t seem to have the same difficulties. Crossrail, despite its delays , was completed, evidence of support for highspeed rail links, but not energy.

Energy suppliers “must act fast” to prevent UK cost crisis from worsening

Whatever the future holds for energy policy, which is unclear right now, the reliability in the industry is that prices will continue to rise. This sad reality offers consumers certainty at least; the price cap, set to be reviewed in October, will likely rise again too.

That, though, will not be the end of this saga, with expectations already abound that it will rise once more in early 2023. These realities support one thing, an energy transition is vital, if not for the environment then at least for our pockets.

Investments in renewable technologies, battery capabilities and even small modular nuclear reactors all hold promise as we move away from our long-held reliance on fossil fuels. The political sphere, though, does not yet seem as innovative in its thinking, a truth that has Tucker perhaps most animated. “It’s an energy crisis right now, and there’s no other way to call it,” he says. “I hope that some folks read this and realise we need to act fast.

“Because committees, subcommittees, new ministers will come and go, and we’ll still be in the same position in five years’ time. We can’t wait for politicians to fix this. We’re going to have to do a lot ourselves.

“Luckily, we’ve got some very good companies in this country; they are going to have to act well outside of politics and start getting on with it.”

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