1. Money

    Annabel Denham

    The Tories’ muddled energy and climate change policy has been exposed

    The Tories' muddled energy and climate change policy has been exposed
    Kwasi Kwarteng (Getty images)
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    A perfect storm is battering the UK’s energy sector. Due to a mix of high demand, maintenance issues at some gas sites, and lower solar and wind output, wholesale gas prices are up 250 per cent since January, and a handful of energy firms have folded. Some economists are suggesting the huge rise in gas prices could be an indicator of nascent inflation, and senior Tories have warned that a looming 'cost of living crisis' could erupt into the biggest political issue of the decade.

    Ofgem has announced that it has appointed British Gas to take on 350,000 customers from People’s Energy, one of two smaller suppliers which collapsed last week. Bulb – energy provider to 1.7m customers in the UK – is pleading with the government for a cash injection. We are still a long way from summer 2018, when pubs couldn’t pull pints and World Cup barbecues were in peril, but the picture isn’t pretty.

    Covid has conditioned us to believe that the solution to any crisis – real or perceived – must lie with the government. Hence the demands for a bailout of smaller, less efficient or unhedged firms unable to cope with surging prices. But there is no justification for expecting the taxpayer to write a blank cheque to unsound businesses. Instead, market forces should be allowed to work, and if relative prices change to balance supply and demand as a result, so be it. Refreshingly, this appears to be the view of our Business Secretary, who yesterday insisted a bailout wouldn't be on the cards. 'There will be no rewards for failure or mismanagement,' he told the Commons.

    There are also calls for nationalisation of the energy sector from the usual suspects who, regardless of the economic ailment, believe expanded state ownership is the cure. But it's unclear how the government could purchase gas any cheaper given global shortages. And, in any case, consumers are far better served by effective competition. What's more, this is likely a temporary problem largely triggered by economies roaring back more quickly than anticipated.

    It has, however, drawn attention to a longer-standing issue: the government's muddled energy and climate change policy. This week officials insisted there are no plans to change the energy price cap, which will remain in place to 'protect people’s energy bills'. Nor will green levies be scrapped to bring down bills, because they play an 'important role' in cutting carbon emissions. 

    It doesn't take an energy expert to see the flawed logic here. If we are to take climate change seriously, are higher prices not desirable, provided the poorest in society remain protected? If we want resilient companies, don’t they need the freedom to set market prices and make a profit?

    At some point policymakers will need to pick a lane. It will be difficult to meet political climate targets without wreaking economic damage. Unpopular decisions will need to be taken. In July, the Office for Budget Responsibility estimated the total cost of reaching Net Zero by 2050 could reach £1.4 trillion. Lord Lawson has predicted the true cost could be twice that figure. The government’s infrastructure adviser has said that families will have to pay up to £400 more a year for food, goods and travel to allow polluting industries to capture their carbon emissions.

    Ministers are in an unenviable position. But this is a problem of their own making. Ministers were warned when the price caps came in that no one, including politicians, can change underlying costs. Price caps can't guarantee lower bills for consumers.

    The decision to capitulate to eco-campaigners and NIMBYs in our approach to fracking was another act of economic self-harm. We still rely on imported gas, meaning the environmental impact is there, but we get no economic benefits. There is no reason at all why a country with the shale deposits we have should be reliant on imports. If we want competitive gas prices, we need domestic investment and policies that signal this is a welcome element in the low carbon transition, rather than a barrier.

    There may be scant public appetite for ending the de facto fracking ban, simplifying the onshore and offshore regulatory regimes, and removing other distortions. But there's only so long that the 'party of business' can continue with its strategy of huge spending, market intervention and hot air.