The government has finally intervened – to protect energy companies’ profits
In her political career, Liz Truss has developed a reputation for U-turns. But even cynics were caught off guard by the new prime minister’s latest ideological shift. The avowed small-state libertarian has just unveiled a massive energy relief package that will see the government intervene in markets to cap household energy bills at £2,500 a year until 2024. Coupled with an additional six months’ relief for business and the public sector, the estimated cost of the intervention could reach up to £200bn.
With the household price cap due to rise by 80% on 1 October, massive intervention was needed. But not all large-scale interventions are created equally. The problem with this one is not the amount being spent, but where it is being targeted and how it will be financed. Basically, it is a massive handout to the companies that have profited from the energy crisis, leaving working people to foot the bill. To make matters worse, it incentivises costly fossil fuel production, when only cheap renewables will help tackle the dual crisis of energy and climate.
To unpack the shortcomings of the plan, we need to start with a brief detour into the rather obscure way in which energy prices are determined. In the wholesale market, generators sell energy to suppliers that in turn sell it to households and businesses. The wholesale price is determined competitively, but the retail price is subject to a cap set by the Office of Gas and Electricity Markets (Ofgem).
The reason so many energy suppliers went bust in the early stages of this crisis is because Ofgem’s cap prevented them from passing on the spiralling cost of wholesale energy to retail customers. With the new plan, instead of letting suppliers take a loss whenever wholesale prices
Read more on theguardian.com
