The gas crunch is driving household bills sky high. Issues such as higher demand from recovering Asian economies and depletion of European gas stockpiles following a cold winter; strategic constriction of supply from Russia; and periods of low wind led to UK and European gas prices rising by 400 per cent last year and counting.
Last week, a group of Conservative MPs wrote to The Sunday Telegraph highlighting the severe pressure on people’s wallets that is being inflicted by the gas crunch. Bills are expected to rise again in April when Ofgem is forced to lift the cap once more. A capped dual-fuel bill (currently around £1280) could go up by a whopping 50 per cent.
The letter made two suggestions: the first was the reduction of VAT on energy bills from 5 per cent to 0 per cent. The second was removing government levies for procuring energy and supporting fuel poor households, presumably into general taxation, given the funding cannot be scrapped altogether without breaking contractual law.
Both are good ideas, but are only short-term sticking plasters that cannot solve the fundamental problem of expensive and volatile gas. And, while VAT rises in absolute terms with the gas cost, the levies are static, so are therefore actually dropping as a percentage of a bill. They’ve reduced from 15 per cent of a typical capped dual-fuel bill to 12 per cent in just a few months, and will drop further when gas prices force bills up again.
For what it’s worth, moving these levies, which are predominantly on electricity (they account for 23 per cent and falling of an electricity bill) compared to gas (2 per cent and falling), would help with the government’s other priority energy objective, alongside security of supply: decarbonisation.
Removing the leg up that gas bills currently receive would make the electrification of heat more economical for bill payers, particularly as the heat pump market scales up and brings upfront costs down. This is why some energy companies called for levy reform even before the current gas crunch, as well as to help bill payers out.
We could try to double down on gas, which already forms the base load of our energy system, but that would likely not bring bills down due to the fact that our gas price unavoidably mirrors the European one, while the gas that companies produce in the North Sea goes to the highest bidder (which is causing the inflation now). In fact, September saw record amounts of British natural gas exported to Europe.
We’re having to bid more for a reduced supply of gas at the moment, but it’s unlikely that we’d be able to produce enough domestically to make a big enough dent in the European price to noticeably reduce bills anyway, since the European gas market is so large.
Trying to do so would also require enormous state support for the oil and gas sector, which struggles with a high cost of production compared to rival gas basins.
The only viable option is to reduce overall reliance on gas through the electrification of the economy, powered by the continued rollout of cheap, domestically sourced renewable energy, backed up by nuclear and storage technology.
Later this year, the results of last autumn’s round of renewable energy auctions will be published. If projections are accurate (they’ve been continuously proven right on the falling costs of renewables), new wind and solar projects will come in below the wholesale energy price when they start generating. They’ll require no billpayer support as they deliver the cheapest energy available.
It’s a typical example of how Net Zero, the overall costs of which the Office for Budget found to be dwarfed by the consequences of climate inaction, will deliver financial benefits to consumers – in this case by cutting bills.
Net Zero is an industrial strategy as much as an environmental one. It’s about using market mechanisms to make our economy more efficient, upgrade to new technology, and scale up new industries where we have comparative advantage, like wind power, sustainable aviation, and carbon capture.
Perhaps most importantly: it’ll reduce our dependency upon gas, which is not only harming the planet but draining our bank accounts too.