Can Liz Truss’s £100bn plan solve the energy crisis?

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Liz Truss is the UK’s new prime minister, and Vladimir Putin has all but cut off the gas supply to Europe.

In the UK, where 85 per cent of homes are heated by gas central heating, and 40-50 per cent of the country’s electricity is gas-generated, soaring European demand for the fossil fuel and the resulting sky-high energy bills mean Ms Truss’s first job as PM is to intervene in the increasingly dysfunctional energy market as millions face winter hardship.

And it’s not only households that will suffer, with many pubs, restaurants and other businesses warning they face closure with bills on course to rise sevenfold in some cases.

Where markets are disrupted and fail with such speed and with such profound impacts, Conservatives’ ideological trust in laissez-faire capitalism is especially exposed to the harsh demands of reality.

Like rabbits hypnotised by the headlights of a deadly juggernaut, practically no strategy to deal with the tsunami of bills was announced by Boris Johnson’s “zombie government”, and similarly, during the Tory leadership race to succeed him, neither Ms Truss nor Rishi Sunak touted a major package to stave off the economic chaos.

Both their campaigns offered plans that would take just a few hundred pounds off the several thousand pounds that Britons are now faced with.

But on the day Ms Truss becomes PM, and hours after she promised to “deliver, deliver, deliver”, a new plan has emerged.

Ms Truss is now expected to freeze household energy bills for 18 months at around £2,500 a year for average households, with the suggestion it could cost the treasury somewhere between £90bn-£130bn.

The £2,500 figure will be made up of the current £1,971 price cap, and with the government honouring its existing commitment to pay just over £400 under the terms of the universal handout previously announced by Mr Sunak when he was still the chancellor.

Back in February 2020, Ofgem’s price cap meant the average bill was around £1,040 a year. It has now risen to £1,971, with another rise next month to £3,549 per year for dual fuel for an average household. Analysts have suggested that by January 2023, it will surpass £5,000 a year, and be on course for more than £6,600 later next year.

Ms Truss’s new plan has been described as a “huge intervention”, by Paul Johnson, the director of the Institute for Fiscal Studies, who said “the £100bn-plus” price tag meant it was a “Covid-style level of intervention”.

“It’s a terrible policy,” he said, “because it’s so expensive”, but he added that it may be the only way of providing support to those who need it within such a tight timescale.

Liz Truss is said to be planning to unveil a price freeze (AFP via Getty Images)
Liz Truss is said to be planning to unveil a price freeze (AFP via Getty Images)

He said the support would also see millions given to those who don’t need it and won’t encourage the energy frugality which might be required to avoid rationing.

There are also concerns that people may then have to pay back the savings in the near future.

Energy industry chief executives have suggested that the huge loans offered to suppliers to fund the price freeze could be repaid through a levy on Britons’ household bills once the crisis is over.

Lib Dem leader Sir Ed Davey has called for a “genuine freeze” paid for through a windfall tax on oil and gas – expressing his concern that Ms Truss appears to want to utilise a “loan system”.

The enormous price tag and the sudden need for emergency government intervention could, of course, have been avoided if successive governments hadn’t ignored the very real drag on the economy of draughty homes and unnecessary overdependence on the fossil fuels they have subsidised.

But it’s too late, so a vast spending splurge is the only immediate course of action.

Even after this huge injection of cash to help people avoid catastrophic bills, the underlying failure to plan a route out of this pickle is looming ever larger.

So perhaps most concerningly of all, Ms Truss still hasn’t set out how the UK can reduce its demand for unreliable and hugely expensive fossil fuels in the future.

Experts have repeatedly explained how this can be done – insulation, heat pumps, and renewable energy.

While scientists, economists and experts in the field have long called for greater government support for heat pumps, alongside investment in insulation to make UK homes warmer in winter, cooler in summer and all-around more energy efficient. Ms Truss hasn’t made this a core policy.

Neither has she shown much support for the renewable energy sector – the only industry which can dependably and rapidly provide cheap, locally produced energy.

Instead, she has criticised solar power – the cheapest electricity production method on earth – said she will allow fracking, and that she would “make sure we exploit all of the gas in the North Sea” – expensive projects which will take decades to provide relatively small volumes of gas which would be sold by the companies that extract them on the open market.

Jess Ralston, senior analyst at the Energy and Climate Intelligence Unit, said: “While a lifeline for many this winter, an emergency energy price freeze could leave households with an average £4,600 debt to pay back in the coming years.

”This ongoing gas crisis levy puts even greater focus on bringing down bills permanently. No-brainer actions to reduce our demand for gas through insulation and renewables is really the only way to do this, so the key question now is: will the new PM acknowledge the arithmetic and invest now to cut bills?”

With plans for greater fossil fuel extraction having no bearing on reducing bills over the next few years, Ms Truss must now look at what she can actually achieve. Inevitably, that will involve renewable energy and a shift away from fossil fuels. She may not like it, but she’ll have to go along with it if she wants to avoid further enormous market interventions, which aren’t really very Tory but seem to keep happening due to stunningly bad planning.