Global gas prices are soaring and millions of British households face a huge shock when the tariff cap — intended to protect us from profiteering by suppliers — is raised in April.
City estimates suggest that unless the surge in wholesale prices eases, the average bill for the 11 million British citizens on standard tariffs could jump by around £700 a year.
Extra bills on this scale would deliver a kick in the teeth to homeowners already facing a big rise in national insurance contributions in April to pay for the NHS and social care.
The jump in gas prices as the world emerged from Covid-19 lockdowns was not anticipated, and has wreaked havoc on the UK’s energy market, which was once one of the most competitive among advanced countries.
Extra bills on this scale would deliver a kick in the teeth to homeowners already facing a big rise in national insurance contributions in April to pay for the NHS and social care
Deregulation of the gas market in the 1990s — where consumers were for the first time able to choose their supplier — opened up an industry dominated by a handful of big suppliers. It offered people in Britain a huge choice of domestic and industrial suppliers which engaged in a price war, encouraging users to switch among firms to find the best deal.
It seemed to offer market competition at its best — favouring the consumer and encouraging the energy companies to be more efficient.
How different things are today. Sky-high gas prices on the world market have caused such shock waves across the country that 26 of those suppliers have collapsed, with more almost certain to fail.
The boss of the nation’s second largest supplier, Stephen Fitzpatrick of Ovo Energy, compares the situation to the financial crisis of 2008, when the government came to the rescue of High Street banks.
Yesterday, suppliers met Energy Secretary Kwasi Kwarteng to demand action — in other words, bailouts.
Predictably, Labour is insisting on a rescue for domestic consumers through the suspension of the 5 per cent VAT we all pay on our gas and electricity bills. (Labour seems to have no awareness that public finances are at a critical juncture, with borrowing this year projected at £183 billion.)
The boss of the nation’s second largest supplier, Stephen Fitzpatrick of Ovo Energy, compares the situation to the financial crisis of 2008, when the government came to the rescue of High Street banks
Of course, there can be nothing but sympathy for the elderly, who fear freezing in their homes this winter, and for the least well-off facing utility bills they cannot pay.
We already give those over 66 a £200 Winter Fuel Allowance but the case this year for a second payout to them, and for extending it to the most needy households, is overwhelming.
However, as for the firms demanding bailouts, many have been plain naive. Dozens of unprepared newcomers came into the energy markets with flimsy financial reserves hoping to make quick returns by exploiting a global gas market with plentiful supplies.
They offered consumers bargain-basement tariffs and many deals were simply too good to be true, based on a false premise that low gas prices could always be found.
What’s more, there are huge differences between the chaos in the energy market and the financial crisis several years ago. Most of the energy failures have been among smaller providers and the impact has mainly been absorbed by the larger firms under the guidance of regulator Ofgem.
In 2008-9 our bank deposits and access to cash were at stake and the whole financial system needed intensive care.
Since the pandemic started, however, almost every business group in the country, from those representing hospitality, steel and freight, has been demanding government assistance.
Companies have become used to VAT breaks, guaranteed government loans, bailouts, furlough and other emergency measures.
And painful though it may seem, they cannot forever depend on government largesse. What we have in the energy market is a perfect storm. And one that could have been avoided had successive governments not made such a mess of energy policy.
The storm was set in motion long ago with our determination to reduce carbon emissions to net zero by 2050. The speed at which we have embarked on this goal has left us utterly dependent on foreign imports of gas.
The Government has all-but stopped burning coal, it has rejected the opportunities offered by vast reserves of shale gas in the North-West and made exploration of North Sea oil fields financially unviable. Shell, for instance, has just pulled out of investing in the Cambo oil and natural gas block off Shetland.
Meanwhile, our nuclear power stations don’t have the capacity to make up the power gap when our turbines and solar panels don’t work.
To make things worse, we have failed to invest in gas storage facilities, meaning we have no strategic reserves like our European neighbours, which leaves us exposed to the vagaries of the gas market.
And here we come to the reason for the astonishing 250 per cent rise in wholesale gas price that reached a record high of 470p per therm before Christmas.
As Asia recovered from the pandemic, the demand for natural gas soared in the Pacific and cargoes of liquid natural gas that were destined for Europe and Britain were diverted to countries willing to pay the highest prices.
The stresses have been magnified many times over by the new ‘Cold War’ between the West and President Putin over Ukraine. Putin’s Russia supplies most of the gas to Europe and, since his relations with the West are at an all-time low, he is limiting supply and cranking up the price.
The stresses have been magnified many times over by the new ‘Cold War’ between the West and President Putin over Ukraine
But there is another factor in this price hike for British households which cannot be blamed on Putin. Responsibility lies with Theresa May. It was she who in 2017 introduced the ‘temporary’ price cap, limiting what energy suppliers can charge, to thwart a similar proposal from Labour’s then-leader Ed Miliband.
In spite of fierce warnings from the ‘Big Six’ energy companies that it would discourage investment in new resources, technology and storage, she pressed ahead.
The result is that although the cap is holding down prices for the 11 million people on the Standard Variable Tariff (which fluctuates with the market) it is killing off those firms without financial reserves to maintain the cap when wholesale prices are surging.
Not only do consumers find themselves suddenly switched to new suppliers and tariffs without any say in the matter, but corporate failures have also cost the taxpayer dearly.
Responsibility lies with Theresa May. It was she who in 2017 introduced the ‘temporary’ price cap, limiting what energy suppliers can charge
Earlier this month, the Government provided temporary funding of £1.7 billion to energy supplier Bulb, which has 1.6 million customers, after it ran into difficulties because its pricing model was so flawed.
The energy regulator, Ofgem, cautioned at the time the cap was introduced that it was too blunt a tool.
Instead of a six-monthly review of the cap, which can unleash a huge jolt to consumers — as will happen this April — it wanted a more flexible approach, with the price cap moved on a monthly basis, making it easier for both consumers and companies to adjust to the new system.
I have a different proposal. Abolish the cap which is producing such devastating distortions to the free market.
End the informal opposition to investment in the North Sea. Britain sits on a sea of natural gas deposits and it is ludicrous that ordinary people are suffering in the short-term as the nation struggles to build reliable alternative fuels.
If there is to be subsidy, it should go directly to the elderly and the most needy. Propping up gas suppliers, who in the good times of cheap wholesale prices creamed off windfall gains, should never be an option.