An energy price freeze is a recipe for blackouts

The government’s takeover of our energy system is almost over. What began in 2008 with plans to shut down coal is apparently about to reach its grand finale: price controls and, their inevitable companion, rationing.

Details are yet to come, but overall the freezing of energy prices as planned by the new Prime Minister would mean that even if suppliers would continue to buy in the crazy wholesale market this winter, consumers would be protected and continue to pay their bills at rates similar to those of today. One way or another, the state would fill the void. Liz “no documents” Truss and Kwasi “lean state” Kwarteng would prepare one of the biggest documents ever devised – well, since Covid.

Of course, unless she is willing to allow extreme mass hardship and depression-inducing price hikes to sweep the country, Ms. Truss has no choice but to do something drastic. The new prime minister, however, has the choice of targeting aid to the poorer half of the country or bailing us all out together. Implementing a price freeze that helps everyone is the wrong approach.

Proponents of a price freeze tout two benefits. The first is that it is simple to implement. There is little opportunity for some bozo from EDF or British Gas to send the wrong letter and terrify the minds of their vulnerable customers. The second is that it will avoid generating an avalanche of marginal cases: households or businesses in difficulty but, because of the design of the targeted aid, left behind. Ms Truss seems to have decided such cases are a political trap she prefers to avoid.

But failing to target aid to those in need, and instead throwing huge sums of money at the wealthy, will have adverse consequences. The first is that it removes the incentive to reduce energy consumption. Prices tell us that we are desperately short of energy and need to reduce demand. When you blunt that signal for everyone, including the most profligate, you leave them no reason to save. The relative attractiveness of energy efficiency measures will not increase as it should.

Instead, the government will have to rely on state-directed rationing. With much of Europe adopting price freezes, there will not be enough gas to meet demand. The extra gas we buy on cold days in continental storage tanks will not be available. Instead, heavy industry will be shut down, with disastrous consequences for growth and jobs, and we will see streetlights go out and offices forced to use electricity sparingly.

The second problem with a universal price freeze is cost. We are in the business of spending tens of billions, but a more targeted policy could cut the bill in half. A targeted program offered by the Resolution Foundation has an estimated cost of £15billion for this winter, compared to £36billion for universal support.

Given the poor state of public finances, rising interest rates and the fact that we don’t know how long this will last, the costs could easily escalate into dangerous territory. The only way to cover them would be to raise taxes on energy consumers and producers or to extend a price freeze to wholesale markets, where producers sell energy. The EU is already studying such an option.

This opens a new Pandora’s box. The overriding imperative should be to get producers to increase supply as quickly as possible. A botched intervention in the gas market risks precisely the opposite effect, reducing gas shipments to Europe and discouraging investment, prolonging the crisis and increasing its cost.

The main objection to targeting aid seems to be that it is difficult to implement. There is, we are told, no definitive list of households and businesses that will need the most help. But we have proxies for these lists and data to expand as needed: benefit recipients, retirees, tax returns and leave data, not to mention the detailed information held by utilities about their customers.

Given that the government was able to set up and administer a furlough scheme for 11.7 million people in one month without a hitch, it seems a stretch to believe that it cannot set up a system for a similar number of households within a similar time frame.

The alternative is the ridiculous prospect of millionaires being paid thousands of dollars to heat their homes. It’s not good stewardship, it’s not sustainable, and it’s not necessary. That wouldn’t be a good start for the Truss administration.

An energy price freeze is a recipe for blackouts

Leave a Comment

Your email address will not be published.