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Liz Truss’ Plan To Freeze Energy Bills Won’t Solve Long-Term Crisis, Experts Say

Liz Truss’ Plan To Freeze Energy Bills Won’t Solve Long-Term Crisis, Experts Say

Liz Truss is being urged to tackle the underlying issues that are forcing energy bills up and not just freezing the price cap at its current level (Alamy)

5 min read

Energy experts have criticised Liz Truss’ proposals to control energy prices and avert a household bills crisis this winter, claiming they fail to tackle the underlying causes of spiralling costs.

Following a meeting with the Queen at Balmoral today in which she was formally appointed as Prime Minister, Truss gave a speech outside No 10 that put tackling energy bills at the forefront of her agenda. 

"I will deal hands-on with the energy crisis caused by Putin’s war," Truss told the gathered crowd of MPs, supporters and journalists. "I will take action this week to deal with energy bills and to secure our future energy supply."

She is expected to make a major announcement on energy bills on Thursday. It has been reported that she intends to fix the unit price of gas and electricity for homes and businesses until at least next year.

This would force firms to sell energy at a loss with the Treasury likely to borrow billions to plug the shortfall. The cost could be added to general government spending and will be paid back over a period through general taxation. Exact details of the plan are yet to be confirmed.

But experts say the plan, which will involve borrowing up to £100bn to protect Brits from being unable to afford to heat their homes this winter, means the new Prime Minister is planning only a short-term fix that is gambling on wholesale gas prices falling next year.

The main driver of higher gas prices – the Russian invasion of Ukraine – shows no sign of abating, and there is currently no plan to encourage people to reduce energy usage, or increase supply.

Energy experts have insisted a longer term solution is also needed, and urged Truss to tackle the “bonkers” way the UK’s energy market works, and insulate the price of cheap renewable and nuclear electricity from being artificially inflated by the high gas prices.

Angela Knight, former chief executive of industry body Energy UK, said the cost to energy suppliers of buying electricity could fall significantly if the way wholesale prices are set is altered.

She told PoliticsHome if Truss looked at “decoupling" the different sources of energy it would mean not relying on the price of gas falling to drag soaring bills down in the future.

Paul Ekins, professor of resources and environmental policy at University College London, explained that the system in place, where the price per unit of all electricity sold to suppliers is set by the most expensive element of the total energy pool, which is imported liquid gas, means that renewable energy suppliers whose costs have not increased this year “are absolutely coining it in”.

Many newer sources of electricity use something called ‘contracts for difference’, which means the price of the power is set and cannot go above a certain rate. But nuclear and many older on-shore wind generators use this ‘marginal unit’ system, and benefit from the fact LPG prices – which only make up 40 per cent of the electricity pool – have rocketed as a knock-on effect from Russia decreasing output in recent months

"To be honest, most people who don't understand that this is how the market works think it's completely bonkers," Prof Ekins told PoliticsHome.

“If you were talking about something like the price of caviar, you could think ‘well, we'll leave the price to the marginal producer because people can get by without caviar’, but when you're talking about something that is a life or death purchase for millions of people, I think leaving that sort of thing to that kind of market is just irresponsible.”

The government also faces problems in calculating the cost of a plan to freeze the energy price cap, as it is reliant on the fluctuating wholesale price of gas, and the market is extremely volatile.

On Monday wholesale gas prices rose by 10 per cent from where it closed last Friday, after Russia said that full operations on its pipelines to Europe would not resume until the “collective West” lifted sanctions, having fallen sharply last week when Germany announced that its gas storage facilities were filling up faster than expected.

Knight, who was also Economic Secretary to the Treasury in the 1990s under John Major, said as well as helping people in the short term, Truss must look at ripping up the energy market rules, set by the regulator Ofgem.

“Because of the price of gas, decouple that by saying we've got a high carbon pool here, and we've got our lower carbon pool over there,” she explained.

“Then you do it on some volume-weighted pricing, thereby bringing down that cost of wholesale electricity to ourselves, possibly as much as 20 per cent by altering the calculus.”

She added: “There are some contracts which need to change, and this is the force majeure that must trigger that contract change.”

Knight's view was echoed by Prof Ekins, who believed it was up to the government and Ofgem's to decide how electricity is priced, and that needn't mean the current system.

“You don't have to price it like that, it would be perfectly possible to have a parallel market, it would be perfectly possible to have as we have at the moment with some of our more recent renewables ‘contracts for difference’ whereby they are paid a fixed sum for the output," he said. 

"If the price of the wholesale goes up above that fixed price, then they actually pay back into the energy suppliers, and those on those contracts are paying back many millions of pounds at the moment because the price is way above the price what was negotiated.”

He said ministers will say “it's not simple” and is administratively and bureaucratically difficult, but did not consider that to be a sufficient defence. 

“Markets are human creations, they’re not acts of God," he continued. 

“We've created the market that we've got back in 1990 when the industry was privatised, and it's absolutely clearly not fit for purpose at the moment and they ought to have seen this coming.

“We're actually in a very good position to be able to reform the market and we have every reason to do so given that gas is now a minority of our fuel.

“There's absolutely no reason why the tail, even if it's a relatively large tail, should be wagging the dog.”

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