Would industry plan to slash energy bills work?

At a meeting with the Prime Minister earlier this month, the energy industry unveiled the concept of an Energy Tariff Deficit Fund. This was an evolution of a previously discarded idea of ​​funding the smoothing of gas price increases over a decade or two.

The most important finding from this is that the energy industry is now all on the same side with this idea. Some companies did not back an earlier iteration of the plan, with British Gas owner Centrica notably calling it a “bailout” for energy companies in January.

The version of that plan circulated earlier this month called for a fund worth over £90billion. Instead of a price cap equivalent to an average household dual-fuel bill of £4,000, prices would peak at £2,000. The fund would pay the difference with some sort of government subsidy.

The fund would be repaid by charging customers an extra few hundred pounds each year for the next ten years, which would see energy caps slowly come down, but would average fairly close to £2,000 a year by the 2030s. Another version of this was presented to the government by Scottish Power last week, my colleague Simon Jack revealed.

The big problem with this is that such a plan will not work alone. But the prospect of £500-a-month bills – effectively a second mortgage – can’t work either. The government has already established that current energy price levels are unsustainable for millions of poorer households. If that were the price locked in for a decade, government support packages would also need to be extended.

This is effectively half of a plan. The other half would be finding funding. There was less consensus in the industry about this. Three options were issued. Repaying the fund with bills of nearly £2,000 a year for a decade as outlined above. Refund through general taxation. Or financing through an expanded windfall tax on “extreme profits” at energy companies. The record earnings reported by such companies will continue to rise as gas prices continue to rise.

The broader point here is that in times of war, the international price of energy forces a massive transfer of wealth from every household to private sector energy producers and those owned by foreign governments.

All of this clashes with the rhetoric of the conservative leadership campaign. Liz Truss has ruled out unexpected taxes, saying she will “absolutely not support” them. Rishi Sunak said aid should be focused on the poorest. His successor as Chancellor Nadhim Zahawi shared this view on Wednesday. The prevailing view among economists is that the part of society that has accumulated savings during the pandemic should use some of it to pay those bills.

The counter-argument is that lowering the energy ceiling in this way is much easier and has the immediate benefit of also keeping the actual inflation rate low, at least in the short term.

There is no certainty that the new prime minister will follow this plan. As the industry gains support, questions will arise about bonuses, dividends, and executive salaries across the industry. But unlike January, the industry is speaking with one voice about what it thinks is needed. Raising the energy cap to the equivalent of a second household mortgage, they say, just can’t happen.