An open letter to the Parliamentarians who signed a letter to ‘The Sunday Telegraph’ on 2 January on ‘Easing energy costs’
You deserve credit for drawing attention in your letter to the potential impact on consumers of the steep rise in energy prices over the past few months. You correctly state: “High energy prices, whether for domestic heating or for domestic transport, are felt most painfully by the lowest paid.”
Unfortunately, you appear to have misdiagnosed the causes of this growing crisis, and hence have called on the Government to act in ways that could in fact make a bad situation even worse for those who are most in need of help.
You appear reluctant to admit that the rise in the cost of heating and electricity is due to the steep increase in the wholesale price of natural gas. There are several reasons for the increase, but the fundamental cause is the fact that the UK remains very dependent on a fossil fuel that is subject to periodic bouts of price volatility. The recent price increase is the result of shortages in the supply of natural gas to meet demand in Europe and many other parts of the world as countries continue their economic recoveries from the COVID-19 pandemic.
The latest version of the ‘Digest of United Kingdom Energy Statistics’, published in July 2021, shows that UK domestic gross production of natural gas met about half of our national consumption in 2019 and just over half in 2020. UK indigenous production has been relatively constant each year since 2012, having declined significantly in the period after the peak in 2000. The North Sea is a mature basin for the exploitation of hydrocarbons, and the UK has been a net importer of natural gas since 2004.
As the Department for Business, Energy and Industrial Strategy pointed out on its website in September 2021, Europe used large volumes of natural gas last winter and has struggled to replenish its stores. In addition, supplies were disrupted by maintenance to gas infrastructure, and low windspeeds overall during 2021 meant that the UK was more dependent on gas for electricity generation than in previous years.
While you do not mention these driving causes, your letter instead suggests that “we have almost uniquely caused our energy prices, through taxation and environmental levies, to increase faster than those of any other competitive country”.
You do not specify which countries you consider to be the UK’s competitors, but the most recent data published by the Department for Business, Energy and Industrial Strategy indicate that you are mistaken.
The latest edition of ‘Quarterly Energy Prices’, published on 23 December 2021, includes a comparison of UK domestic energy prices with those of 14 other European nations, including fellow members of the G7, France, Italy and Germany. It shows that UK domestic electricity prices, including tax, were just 0.1 per cent above the median for the other European countries during the period between January and June 2021. UK prices were lower than in Germany, Denmark, Belgium, Ireland, Spain and Italy. And UK domestic gas prices, including tax, during the same period were lower than in any of the other 14 European nations.
However, you are correct to state: “Once the current domestic energy price cap is reassessed for implementation in April 2022, the likelihood is that domestic tariffs will increase hugely, feeding directly into a cost-of-living crisis for many.”
Unfortunately, your suggested remedies are likely to have negative consequences for many consumers, particularly as you have bizarrely ignored the most important existing mechanism, the Warm Home Discount, through which the rise in energy costs can be countered for those most in need.
You call for the removal of Value Added Tax on sales of domestic energy. VAT is currently charged at 5 per cent on both electricity and gas. According to the latest figures published by Ofgem, the average annual dual fuel (i.e. electricity and gas) bill for domestic customers of the largest suppliers was £1,184 in 2020. On average, £56 of this bill was VAT.
You also call for “the removal of the environmental levies on domestic energy, which in the case of electricity amount to 23 per cent of the bill”. You do not indicate which specific levies you would like to abolish, but your estimate of 23 per cent for electricity bills appears to include all the “environmental/social obligation costs”, which accounted for £182, or about 15 per cent, of the average dual fuel bill in 2020.
Altogether, your measures would reduce the average dual fuel bill by about £238. This would be distributed across all consumers, and not targeted at the poorest households, so that the smallest consumers would save the least in absolute terms.
But these cuts in taxes and levies would also de-fund not only support for renewable energy but also schemes that are specifically targeted at poorer consumers to help them with the costs of energy.
In particular, it would de-fund the Warm Home Discount, depriving more than 2 million pensioner and low-income households of a rebate of £140 on their energy bills, which they are each due to receive by the end of March 2022. This scheme is by far the most obvious existing mechanism through which poorest consumers could be helped directly with the cost of energy. The Government is currently proposing to increase the rebate to £150 from next year, and to make 780,000 more households eligible.
It is very peculiar that your letter implies de-funding the Warm Home Discount instead of urging the Government to increase and extend the rebates.
Your letter rightly warns: “We hardly need to point out the risks of relying on other countries for our energy needs, especially those hostile to us.” The current surge in energy bills is entirely due to our continued dependence on fossil fuels, exposing us to the persistent risks of volatile market prices.
But inexplicably you suggest: “This leads to the inescapable conclusion of the need to expand North Sea exploration and for shale gas extraction to be supported.” In fact, the UK Government is already providing significant financial support for the offshore domestic oil and gas industry through repayments of Petroleum Revenue Tax receipts and Offshore Corporation Tax.
The latest assessment by the UK Oil and Gas Authority concludes that proven or probable reserves of oil and gas on the UK continental shelf could sustain current projections of production until 2030. Production from the North Sea is likely to decline over the coming decades and the UK would still be highly dependent on imports of natural gas if consumption remains at current levels.
If you want to advocate for a strategy that ensures affordable, secure and sustainable energy supplies in the future, you should be calling on the Government to accelerate the development of the UK’s domestic clean energy sources, particularly renewables, which could eventually eliminate our dependence on fossil fuels.
Such a strategy is also likely to avoid damage to the lives and livelihoods of your constituents and the rest of the UK population, particularly those on the lowest incomes. Although you neglect to mention it in your letter, the consumption of natural gas for electricity generation and heating, without carbon capture and storage, emits carbon dioxide and methane. The rising levels of these greenhouse gases in the atmosphere is driving climate change, which is creating ever-growing impacts on the UK through rising sea levels, increases in heavy rainfall and more intense heatwaves.
The lowest-income households are most vulnerable to the impacts of climate change. If you are really concerned about helping those who are most in need, you should be strengthening your commitment to achieving net zero, which was an explicit pledge in the 2019 Conservative Manifesto.