As the UK economy continues its recovery from the pandemic, we must confront the global inflationary pressures caused by the world economy coming swiftly back to life. Much of this inflation is being driven by the rising cost of energy due to increased demand worldwide – and that feeds through into pressures on the cost of living.
We must be honest that there are limited levers the Government has to deal with these global problems. The Government has already taken steps: reducing the Universal Credit taper rate, increasing the National Living Wage, freezing fuel duty for the twelfth year in a row, and launching a £500 million Household Support Fund to help the lowest-income households with their bills.
But the Government recognises that it must go further to help families with pressures on the cost of living. We must also be honest that over time, households will need to adjust to higher energy costs – but the Government can help ensure the adjustment to higher prices is smaller initially and spread over a longer period.
Following Ofgem’s – the independent regulator who sets the price Energy Price Cap - confirmation that the energy price cap will rise by £700 from April, we have announced a three-part plan to help with household fuel bills immediately and protect people against half of this increase – worth £350 per household, in a total package of support worth £8.6 billion.
• A £200 ‘smoothing’ rebate on energy bills for all households, to be paid back over the next five years at £40 per year – starting from April 2023;
• A non-repayable £150 cash rebate for homes in Council Tax bands A-D – equivalent to 80 per cent of all households, helping both lower and middle-income families;
• £144 million of discretionary funding for local authorities to support households not eligible for the council tax rebate.
The Government is also continuing with plans to increase the Warm Homes Discount and extend eligibility by one-third to 3 million vulnerable households which is worth £150.
I appreciate that many are disappointed that Ofgem raised the cap in April which will affect around 22 million customers. I understand that the increase is driven by a record rise in global gas prices over the last 6 months, with wholesale prices quadrupling in the last year. I am encouraged that Ofgem is working to stabilise the market and over the longer term to diversify our sources of energy which will help protect customers from similar price shocks in the future.
Although those protected by the Energy Price Cap are paying a fair price, these customers may also be able to reduce their energy bills further by shopping around for a better deal. Changing energy provider has never been easier and switching energy can be done online or over the phone. Comparison sites provide useful information on which providers can give customers the best deal and, as a result, changing energy provider is likely to save households money on their energy bills. Almost 500,000 energy customers switched to a new supplier each month in 2020, according to figures from the industry group Energy UK.
If an energy company fails, the Government has been clear that it will not bail them out. It is wrong for the taxpayer to prop up companies who have poor business models and are not resilient to fluctuations in price. There are clear processes in place to ensure that all customers are supplied with energy. When an energy supplier fails, Ofgem typically appoints another supplier to take on serving its customers and there is no interruption to supply.
More broadly, I am glad that the Government is working to reduce bills and tackle fuel poverty, such as through the introduction of schemes to improve energy efficiency measures in homes. In addition, the Government’s Energy Company Obligation and expanded Warm Home Discount schemes will provide at least £4.7 billion of extra support to low-income and vulnerable households between 2022 and 2026.
I appreciate that many would like to see a windfall tax on oil and gas companies, however, the Government does not intend to introduce such measures for a number of reasons. The UK’s oil and gas sector is world-leading, with particular benefits the union, with key sites in Aberdeen and Teesside. Sudden rate changes would discourage investment and job creation, depress production and make the UK more reliant on imported gas. The oil and gas industry and its supply chain support almost 200,000 jobs, but investment in 2020-21 was at an all-time low of £3.5 billion. There is £11 billion of opportunities awaiting investment and the Government believes that a windfall tax would threaten the investment we need to support jobs and increase the economic recovery of our gas resources.
Further, as I understand it, a 10 per cent windfall tax, which has been proposed, would likely raise much less than they claim, and depending on companies’ behavioural response, may actually reduce tax revenues. Additionally, the current tax rate charged on oil and gas profits, which is 40 per cent, is already more than double the rate charged on profits in most other sectors of the economy, which is 19 per cent, and has been in place since 2016. It was not reduced when the oil price fell to below $20. I am sure you can appreciate that for these reasons a windfall tax will not be introduced.
I appreciate that many are also concerned about the energy bill rebate and how it will be implemented. You will be reassured to know that the Department for Business, Energy and Industrial Strategy (BEIS) is consulting on the details of the rebate and how best to deliver it to ensure that domestic customers on different payment methods and supplier contracts benefit. As far as I am aware, there is not an opt-out option, however the consultation will provide more detailed information.
Moreover, I understand that many are disappointed the cost of prepayment meters is higher than those who pay for their gas and electricity by direct debit. As I understand it, prepayment customers have infrastructure that other customers don't use, and the costs of supplying prepayment meters compared to standard meters are higher due to the different meter requirements and different payment systems. As such the cost of serving those customers is higher and therefore prepayment customers pay more. You will be reassured to know that the Energy Price Cap ensures those on prepayment meters pay a fair price for their energy and of course the Chancellor's support package extends to prepayment customers.
Regarding the impact of the energy price cap rise on the finances of student households, I must tell you that universities and private accommodation providers are autonomous and are responsible for setting their own agreements over rent and bills. The Government therefore plays no direct role in the provision of student residential accommodation, whether the accommodation is managed by universities or by private sector organisations.
I know that advice is available from HE providers and from other sources online to help students manage their money. Further, I welcome that the Government has allocated £5 million to higher education providers in England, which will provide additional support for student hardship.
Finally, I am sure you can appreciate that comparing energy price caps from different countries is not necessarily useful as the landscape of each countries' energy market is different. For example, I am aware that the energy price cap in France has increased by 4 per cent. However, the money to fund the high global gas prices must come from somewhere and it will be French taxpayers and investors that make up the difference.
France supplies around 70 per cent of its energy from nuclear plants. While renewables are likely to provide the majority of the UK's carbon-free power by 2050, reliable low-carbon power sources, such as nuclear, are also needed to achieve a low-cost reliable system for consumers and therefore nuclear will continue to have an important role to play in the UK’s energy future mix.