Perspectives: How should the UK respond to energy prices?

By Ross Melton & Verity Barton, Public Policy Team London

In this latest instalment of Instinctif’s “Perspectives” series, Ross Melton and Verity Barton bring their (mostly) contrasting political viewpoints to bear on the increasingly pressing issue of rising energy prices.

Times are tough. People are paying more for essentials for the first time in a generation, from fresh fruit to nappies. Whether it’s working families turning to the local foodbank for the first time, or older residents on fixed incomes choosing between heating and eating, everyone is feeling the pinch. Inflation is also rising, and the average domestic energy bill is set to soar to over £3,000 in October and further in February 2023.

The negative impact of energy prices on household finances is among the top concern for British voters, which makes this a prime issue for policy solutions from “opposing” perspectives from across the Public Policy team. As usual, Ross and Verity help navigate the left-right divide, but also find some common ground on this widely troubling issue.

Energy prices: the view from the left – by Ross Melton

Campaigning in west London as a Labour councillor – after the obligatory Boris Johnson discussion – one topic comes up time-and-again: the rising cost of living.

On the doorstep, supporters have welcomed the Shadow Frontbench’s diagnosis of the problem but often appear to be less aware of Labour’s proposed solutions to their energy cost challenges.

Emergency support for households

While many have praised Labour championing a 10% Windfall Tax in Spring 2022, the Government stole the Opposition’s clothes with the rebranded Energy Profits Levy of 25% on all oil and gas producers in May. The problem with this approach is that it’s a one off, raising only £5 billion to support a forecasted 12 million families in fuel poverty. To put this into context, the Government-backed £400 loan to families in fuel poverty is projected to cost almost double the funds raised by the Levy at £9.1 billion. This is dwarfed by the approach of our European neighbours, with Italy announcing a whopping £30 billion package in energy subsidies and France going even better with £32 billion. Economic analysis already indicates more generous support for consumers has helped stimulate regional economies, ward off inflation and keep millions out of poverty.

I’d like Labour to match the bold approaches of our European neighbours, putting money in the pockets of consumers by slashing VAT on electricity and providing direct support for the most at-risk families through a permanent Universal Credit uplift.

This would be funded by a permanent tax increase on carbon extraction industries using a “polluter pays” principal. As a nakedly biased non-driver, I would also support the reversal of the Government’s 5p cut on fuel duty (a controversial policy considering the urgency of reducing carbon emissions). A tax escalator of incremental increases would encourage drivers to switch to EVs, while funding support for fuel-poor customers and investment in low carbon infrastructure.

Rebalancing the energy system in favour of consumers

Part of the reason other European countries have been able to be more generous is the deeper integration and control governments have over their energy systems. For example, as the only shareholder in Électricité de France (EDF), the French Government has been able to impose a strict 4% cap on energy price rises, well below inflation, effectively socialising EDF’s profits from Government coffers directly to consumers. As a major UK energy supplier, skyrocketing energy costs north of the Channel are effectively subsidising energy bills south of the Pas-de-Calais.

During his Labour leadership campaign, Keir Starmer committed to maintaining his predecessor’s plans to “bring mail, rail and energy back under public ownership”. While he has since sought to distance himself from renationalisation, the need for a bold reform of the UK energy system is essential to both accelerating decarbonisation and keeping consumer energy bills down.

With the collapse of dozens of UK energy suppliers over the past 6 months driving consumer energy prices higher, the UK’s deregulated energy retail market has failed. There is a strong case for greater state oversight and control of the energy market through a reformed regulator.

Boosting energy efficiency

Finally, Labour has flirted with Keynesian investment in low carbon energy through its Green Industrial Revolution policy, aiming to secure high skilled, well-paid jobs in renewables while accelerating decarbonisation of the UK economy. A Labour Government should double down on this approach, using increased tax revenues from carbon-emitting energy industries to fund a massive investment in energy efficiency and decarbonisation.

Insulating Britain’s aging and inefficient housing stock would be a great first step, creating skilled jobs in retrofitting insulation, triple glazing, and heat pumps, while reducing energy bills. Last year the Energy Savings Trust estimated that the average home could shave £250 off annual energy bills with a couple of centimetres of loft insulation – this saving would be even greater at current energy prices. By replacing and expanding the Government’s failed Green Homes Grant scheme, Labour could make funding much more accessible, supporting thousands of new jobs and retrofitting businesses.

While rising energy costs are a crisis for families across the UK, it is also an opportunity for Labour to boldly demonstrate how to build a more equitable and just economy prioritising ordinary consumers and the environment over corporate profit.

Energy prices: the view from the right – by Verity Barton

Now, more than ever, after two years of unprecedented state intervention, there are calls for the Government to do something to help with household finances. My instinct is to fight back against these calls and argue for the free market with limited Government intervention. We can, and should, still aspire for that. But the reality is, the current economic situation is biting hard for many people.

The Conservative Government was elected on a manifesto of creating a fair society, and while I know not everything in the manifesto has been held to (a commitment not to increase National Insurance for example), a party that has governed more than any other in history must be compassionate when people need it most. The Conservative Party’s track record of competence in Government demands it. With energy prices and the cost of food set to continue to rise in the short-term, now is the time for more positive action from Government. As Members of Parliament battle for the leadership of the Conservative Party, their plans to tackle rising energy prices – and the cost-of-living crisis more broadly – will be a key factor in the race to be PM and their Government’s success. 

So, that begs the question: what should the Government do? For me, it needs to put more money back into people’s pockets and look at a range of energy efficiency measures, so people use less gas and electricity. 

Cutting taxes to reduce the burden of energy prices

First, cut taxes. I know they’re not a panacea to all our ills, but the current tax burden is the highest since the 1940s and higher taxes means people have less money in their pocket at the end of every month.

Cutting taxes to stimulate the economy and promote growth should always be one of the first measures a Conservative Government considers. Instead of the Government taking money, only to return it to taxpayers via energy rebates, they should leave more in our pay packets. The last Budget proposed a reduction in income tax from 2024 – this should be brought forward and extended not just to the lowest earners, but also those who pay 40% income tax. This can be done either by changing the thresholds at which you pay income tax or by reducing the rate itself; in an ideal world, I’d love both. Additionally, the Government should scrap the National Insurance increase. I appreciate that leaves a hole in social care funding, but there are other efficiencies that can be found to cover the gap. 

Improve home energy efficiency to reduce household bills

Second, make energy use in homes more efficient. There are lots of things that are already being done to promote energy efficiency, like the boiler upgrade scheme, but more should be done. Those who can least afford increasing energy prices are most likely to live in homes that aren’t energy efficient. 

Heat pumps alone aren’t going to be enough. If we can help those facing fuel poverty improve the energy efficiency of their homes, they’ll use less energy. That’s a win-win: better for their household budgets and for reaching Net Zero. While their road blockages might frustrate me, Insulate Britain has a point. We should promote and encourage the installation of insulation. But it’s not just insulation, we should also look at ventilation. Poorly ventilated homes aren’t just bad for people’s health, they’re bad for energy efficiency. Presently, across the country, to fight a battle against mould and damp, people open their windows in winter to better ventilate their homes. When they do that, they lose heat and waste energy. The domestic renewable heat incentive and other domestic energy efficiency schemes should provide grants for people to install insulation and ventilation measures in their homes.  

There are no easy options, and the current Government has already made attempts at easing the burden through payments for households and more for the vulnerable. But more can – and should – be done in the longer-term. Labour will argue that a tax on the oil and gas industry is the solution, but that’s short-sighted and won’t help us address the real challenges we’re facing. 

What should be done to improve social mobility – read Ross and Verity’s Perspectives