Running low on fuel

Over the past week – and for much of the last two years – the pandemic has dominated public debate. But it may now be distracting us from the crisis that will truly upend British politics in 2022: the soaring cost of living. 

In less than a month, energy regulator Ofgem will review the fuel price cap. It’s predicted that the regulator will announce another rise to the energy price cap, effective from April, forcing the average UK household to spend an extra £600 on energy bills in 2022. 

Kawsi Kwarteng, the business secretary, has been in endless summits with energy bosses this week to sort out the mess while Boris Johnson says he will announce measures to stave off Britain’s fuel crisis before the Ofgem review. This means he has just weeks left to come up with some sort of solution. 

What are the various options ministers are grappling with? 

The Labour Party, alongside a number of Tory backbenchers, is urging the government to follow the lead of many European countries and scrap VAT on domestic fuel. But others argue this is lazy economic thinking, and a token tax cut. As Ben Ramanauskas, an economist at Oxford University, points out, VAT on energy bills constitutes just 5% of the total sum. Removing it would produce a very modest saving and “make practically no difference to the poorest people in the country.”

The government could also temporarily suspend the green levies on energy bills, which are designed to reduce dependence on fossil fuels. It would be less-than-perfect timing so soon after the UK proudly hosted COP26, but the option is gaining support among some Conservative backbenchers. 

Alternatively, the Treasury could adopt a more targeted approach. It could directly compensate the hardest hit households, by increasing winter fuel payments, state pension and universal credit. Though a one-off payment is unlikely to suffice; it could be months – or even years – before energy prices fall back. 

An altogether different approach would be to subsidise the energy companies themselves. An advantage of direct intervention in the energy market is that the government could prevent more energy providers from going bust. But this wouldn’t be a cheap option. Simon French, chief economist at Panmure Gordon, estimates that it would cost the Treasury upwards of £10 billion next year to subsidise energy companies enough to limit household tariff increases to just 10 per cent. 

Yet all these solutions are sticking-plasters. Longer term, the UK must improve its energy security, ensuring that we are not reliant on hostile states like Russia for the bulk of our fuel.

Johnson is hoping to do so by investing in more renewable and nuclear energy. Though others in his cabinet are demanding that the UK ends its moratorium on fracking and pursues more intensive exploration of North Sea oil and gas. 

There is no easy solution to what might turn out to be a full-blown fuel poverty crisis. But it is well within the Tories’ interest to act fast. The spiralling cost of heating and electricity is not the backdrop for a healthy economy – and certainly won’t result in a happy electorate.