ourEconomy: Analysis

The government’s new energy strategy is full of holes. Here’s why

By focusing only on supply, the government’s energy strategy offers a one-dimensional solution to a multifaceted problem

Chaitanya Kumar
8 April 2022, 4.28pm
Boris Johnson visits the National Renewable Energy Centre in Blyth, Northumberland
Owen Humphreys/PA Images / Alamy Stock Photo

The government’s energy security strategy, published yesterday, failed to provide a sensible, long-term response to our energy crisis.

In a moment of novel clarity, Boris Johnson spoke of how energy policy had too long been ridden by short-termism and that there was a need for much more long-term thinking. It is hard to disagree with the prime minister there. But what we got in the energy security strategy belies that ambition and instead delivers a one-dimensional solution to a complex problem.

The myopic focus on new sources of energy supply is the strategy’s central weakness. Of course we need all the low-carbon energy we can get to displace fossil fuels, and that means scaling up wind, solar and nuclear. The government has set some fairly ambitious targets for new energy generation from these technologies. Some of these, I might argue, are unrealistic, as is the case with nuclear power. Nevertheless, the strategy correctly identifies clean energy as the main way to address the energy crisis while keeping bills low.

But by focusing just on supply, we continue to pour billions of pounds more of public money into a fundamentally broken energy market.

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The first question to ask is why we pay so much for our energy in the UK, despite a quarter to a third of our power coming from wind and solar. After accounting for the upfront capital costs of these technologies, every unit of electricity produced is free and yet we pay several times more than what it costs to generate electricity from these cheap sources.

The design of the UK’s electricity market is to blame. It gives gas plants a more central role in the energy system, allowing them to set the overall price of the market. As gas prices have risen internationally, so have our domestic prices, effectively negating the benefits of cheap renewables. Adding more wind and solar will not reduce consumer bills if the market continues to be rigged in favour of gas, but the strategy had precious little to say about this.

Focusing merely on new ways of generating and storing energy also underplays the role of energy efficiency. The government’s own flagship programme for efficiency, the Energy Company Obligation (ECO), showed estimated annual savings of £300 to £350 per household that received retrofit measures. Combined with the £350 support package from the government, this would have fully cushioned the blow on households from the recent rise in energy bills. Energy efficiency cuts energy bills immediately and permanently, and failing to promote it, with no additional funding or regulatory commitments, is a serious missed opportunity.

The energy security strategy fails to address the need for reform in a retail market in which suppliers engage in price gouging

Another feature of Britain’s broken energy market is the failure to create a competitive market with a large number of energy suppliers. After the loss of nearly 40 suppliers over the last year, the market has returned to being a form of oligopoly, dominated by the big six energy companies. The introduction of a temporary price cap under Theresa May’s government was largely in response to the rip-off prices from the big suppliers that took advantage of vulnerable and ‘sticky’ customers with expensive prepayment plans.

But the cap has already been revised multiple times since then, at the expense of ordinary consumers, and energy companies are lobbying for it to be removed entirely or revised more frequently, undermining its very purpose as a safety net for millions of households. As we enter another period of market consolidation by the big six, consumers could face high energy bills for a long time to come. The energy security strategy fails to address the essential need for reform in a retail market in which suppliers engage in price gouging.

Fixing these problems is central to any meaningful energy strategy. The government and energy regulator Ofgem need to overhaul the electricity market in a way that allows the low cost of renewables to be passed directly to consumers instead of into the pockets of energy suppliers. It also needs to review the ownership and management of electricity generation assets. Reforming the retail energy market – either through greater competition (unlikely), or through much stronger regulation and a properly enforced price cap – will be necessary to protect consumers.

Without a commitment to fixing these holes in the design of the UK’s energy system, adding more generation, clean or otherwise, is akin to pouring water into a leaky bucket.

The government had two clear questions to answer in its energy security strategy: how do we wean ourselves off fossil fuels, and how do we reduce energy bills? But the strategy was just a statement of intent and failed to answer either of those questions in any coherent manner.

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