There is an old nursery rhyme about how an elderly lady tried to rectify swallowing a fly by swallowing a spider, only to quickly realise she would now need to deal with the spider. She proceeds to consume a whole host of animals until she predictably dies. It’s a pleasingly nonsensical and morbid illustration of the danger posed by charging in with a simplistic solution before considering the wider consequences.
Whilst I’m sure no one would confuse Sir Keir Starmer with an old lady, I couldn’t help but think of that poem as he announced that his solution to surging energy prices would be for the government to cover the cost of cancelling this winter’s increase in the energy price cap. It’s a policy that’s liable to leave us all with indigestion.
Despite waiting long enough that the Liberal Democrats were able to announce basically the same policy a week before them, Labour’s agonising had produced few extra details. It offers no support to public services or companies whose energy bills are not regulated by the price cap, so running the very real risk that schools and hospitals will be forced to shut during the winter, and that businesses will go bankrupt. What’s worse, is that many of the jobs lost would be in the leisure and hospitality sectors, which the government spent billions on protecting during the pandemic.
There is also nothing in Labour’s plan about how to ration energy should supplies become limited. True, Britain is less exposed than most European countries, but there is a real risk of energy shortages due to the continuing tensions with Russia, greater global demand for Liquified Natural Gas, and the dry weather having reduced the amount of electricity generated by Norway and France. Whereas continental countries are moving forward with plans for reductions in energy consumption to protect supply, this is not even part of the debate here in the UK.
Then there is the question of how Labour proposes to pay for what will be a £29bn intervention in the energy market. Having successfully pushed the government to introduce a windfall tax on energy company profits earlier this year, Labour is now arguing to go back to them for a further £8bn. Leave to one side that constantly going after energy company profits merely disincentives them from investing in infrastructure to increase supply or bring the cost of delivering energy down, this measure badly misreads a key structural problem in Britain’s energy market.
One of the reasons that Ofgem believes the cap needs to go up is because many of the smaller energy suppliers will go bankrupt if they’re not allowed to increase bills. This is because they failed to sufficiently hedge against wholesale price increases, either by signing longer term contracts for fuel or not having sufficient capital reserves. Labour is effectively redistributing money from the profitable energy companies to the unprofitable ones to save a market it once pledged to abolish.
That lack of interest in structural reform is mirrored by the worst aspect of Labour’s package; it only lasts for six months. This is despite the expectation that elevated prices will continue throughout 2023 as western nations scramble to facilitate greater trade in LNG by boosting American production and European storage capacity.
Over the past two years our politicians have bounced from one crisis to another. Everyone must realise that we will never escape this constant state of crisis if we keep justifying poorly thought through policies on the grounds that they immediately solve an emergency.
That we are confronted with the possibility of household energy bills increasing by 70 per cent this winter is a clear sign that our energy market is broken. But it is a symptom of a wider implosion. A genuine solution must do more than what Labour is proposing, it has to also support public services and businesses, reduce consumption wherever safe, increase rather than discourage investment in infrastructure, reward rather than punish suppliers who sufficiently hedged against future price shocks, and be good not just for Christmas but for next year as well.
Sir Keir Starmer doesn’t necessarily have to follow through on his leadership pledge to continue to advocate for the renationalisation of energy suppliers, but he does have to do better than this. Because if the government was to spend £29bn just swallowing the October energy price cap increase, what will they have to swallow next?