We can do so much better (and fairer) than Truss’s bailout for the rich
OPINION: The UK needs targeted, smart help for energy bills, not cash to help the rich use more than their share
Handing a couple of hundred billion pounds of government money to energy companies to subsidise every British household and business for the next 18 months is a spectacularly stupid policy.
But that’s what Liz Truss has just done.
Even at the lower end of estimates, the plan will cost the state more than the pre-pandemic annual cost of the entire NHS. Given that it pegs everyone’s energy bills at the April 2022 level – already unaffordable for many – the Truss universal subsidy will leave 6.5 million households in fuel poverty and millions more still facing mounting debt. Even at April prices, the head of Citizens Advice told MPs on 6 September, the day Truss walked into Downing Street, the independent charity was seeing “record levels” of people simply unable to afford to use any power at all.
Meanwhile, Paul Johnson of the Institute for Fiscal Studies has told BBC Radio 4’s Today programme “the majority of the money will go to better off people who use more energy so this is very poorly targeted”. That’s because the richest households currently use twice as much energy on average as the poorest. Financial journalist Martin Lewis, who created a website to give money-saving advice to consumers, blogged that Truss’s plan clearly “isn't targeted at helping those who need it most”. Ruth London of grassroots campaign group Fuel Poverty Action said the plan’s benefits “will largely accrue to people who can afford to use a lot of energy, while people who are barely putting the heating on will save very little”.
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Economists across the ideological spectrum point out subsidies that keep demand high from the better-off will increase the risk of blackouts, when there simply isn’t enough non-Russian energy to go round Europe this winter. Nor does Truss’s solution do anything to reduce use and help address climate change.
Pretty much the only thing in its favour is that it’s quick.
Truss ally Iain Duncan Smith has told The Times the Tories haven’t got time to target the money: "[Truss] is going to do something big and bold, and it’s going to be getting the money to everybody... There’s no time now to be small or narrowly targeted.”
Only the Tories could think it reasonable to argue they simply haven't got time to spend money carefully. It’s a familiar defence after the past two years. But unlike at the start of COVID-19, they’ve had months to prepare for the impact of the Ukraine war on this winter’s fuel bills. They have spent those months thinking about little other than propping up their leader, plotting against him, or picking his replacement.
A tiered price cap
But there is a policy that enjoys support from think tanks of the left and right, environmentalists, and parts of the energy industry. It’s also exactly what Germany has just announced and is right now trying to encourage across the rest of Europe.
The tiered price cap, or rising block tariff, gives every household a heavily subsidised, or even free, basic energy allowance, enough to meet modest needs. Energy use over and above that level is charged at considerably higher rates.
The most radical version of this scheme has been put forward by Fuel Poverty Action and the left-of-centre New Economics Foundation (NEF), among others. A free basic allowance for all would meet the majority of the energy needs of lower income households. Charging more for excess use, mostly by richer households, would reduce the amount of money the government needed to put into the system. NEF estimates a price tag of £14.7bn, which it suggests could be raised from borrowing or profit caps on producer profits. Fuel Poverty Action says it could be funded by windfall taxes and ending subsidies to fossil fuel companies.
Energy company Ovo has proposed a similar approach, with every household receiving a limited allowance of heavily subsidised (though not free) units. Centre-right think tank Policy Exchange has proposed a similar tiered scheme, funded by the taxpayer and costed at £27bn for this winter, plus £10bn in enhanced benefits.
The organisations putting forward these plans point out that poorer households would get almost all of their energy either free, or subsidised at a rate far lower than the April 2022 price cap; middle-income households would also have most of their energy subsidised; but the richest would get only a small portion at a discounted rate.
Not only is such a plan broadly progressive – it also crucially doesn’t wreck the incentive to save energy for those who are actually in a position where they could use less without hardship. This would mean better progress on climate change targets and towards energy security by reducing our reliance on gas (and the likelihood of blackouts this winter).
Of course, no single measure is perfect and this one is no exception. But the money saved on subsidies for profligate energy use by the (mostly) rich could be directed towards councils to urgently install simple draught-proofing and insulation measures in homes. And it could also, as NEF and Policy Exchange advocate, be used to boost benefits for lower-income, older and disabled households, something that could be done very quickly. It would be simple and quick to give homes in the colder north, which also tend to be more poorly insulated, a somewhat larger basic energy allowance, and to boost existing discounts for disabled people and pensioners.
A back-up or longer term plan could be to set energy tariffs as per income levels instead of the imperfect metric of energy use. The Resolution Foundation has suggested a discounted tariff for every low and middle-income household. Or, as the Green Party urges, some combination of the two plans.
“It is important for the government to design the price cap in a way that avoids it benefiting the richest most, as Labour’s proposal does, or accidentally encouraging people to use lots more energy than they need,” Carla Denyer, co-leader of the Green Party, told openDemocracy. She backed a cheap energy allowance or rising block tariff, but with income factored in as well. “Higher income households would see progressively increasing costs as they use more and more energy,” Denyer said, “so that those using very high levels of energy – for instance, heating every room of a large and poorly insulated house to 23 degrees, or heating a swimming pool – would pay much higher rates.”
Such a granular level of income and needs-based finessing would, however, require a high level of coordination and information-sharing between government tax and benefit departments and private energy retailers. And it’s hard not to conclude that this would be simpler and quicker if energy retailers were nationalised, something the Trades Union Congress estimates would cost only £2.8bn, a tiny fraction of all the support packages currently being mooted.
However, the government and most of the media seem to be largely ignoring these proposals. Instead, the government’s longer-term plan – which Truss’s new chancellor Kwasi Kwarteng said “totally makes sense” in his previous role as business secretary – does not, in fact, make sense. That plan appears to be to charge customers more for the energy units they use at peak times and less at quieter times like at night. But given that energy prices are likely to stay at high levels, such a scheme could make it an expensive luxury to have a shower or cook a meal at a normal time. Using a modest amount of energy to meet normal human needs at a normal hour of the day should not be a luxury, available only to those who can afford it.
In short, it’s simply not true that government support is “too hard to target”. Sure, it will take a while to work out a perfect system, as crippling levels of inequality and profiteering are the root cause – but we could make a start this October.
Instead, Truss has started her premiership by making a choice to waste time, money and political capital helping the rich while leaving the poor still struggling and Britain’s climate and energy security unprotected.
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