Transmission tower and raising sparkline chart representing electricity prices rise during global energy crisis.

No ‘blank cheque’ for Energy Price Guarantee outlays, says Cambridge paper

20 September 2022

The article at a glance

British taxpayers ‘deserve an accounting’ of energy cap spending including whether it stimulates long-term UK energy investment, says new paper from Energy Policy Research Group at Cambridge Judge Business School.

British taxpayers ‘deserve an accounting’ of energy cap spending including whether it stimulates long-term UK energy investment, says new paper from Energy Policy Research Group at Cambridge Judge Business School.

UK taxpayers deserve an accounting of who benefits from the government’s costly Energy Price Guarantee and whether these profits are stimulating long-term investment in the UK energy sector, says a new paper from the Energy Policy Research Group at Cambridge Judge Business School.

“£150+bn over two years (as the estimated cost of the policy) is a lot of money and no-one should write a blank cheque for this kind of additional public expenditure,” says the paper. “The £150bn will be paid out to electricity and gas companies. Where will this money go and what effect will it have?”

Showing who benefits from money paid to energy companies could lead to calls for further taxation of the industry

The paper by the Energy Policy Research Group, which is based at Cambridge Judge and draws on researchers throughout the University of Cambridge, said an accounting for who benefits for these outlays “will naturally give rise to questions as to whether further taxation of war time profits – which is what these profits are – is needed.

“We should be able to see where profits are being made in the energy value chain and whether this is stimulating beneficial long-term investment in the UK energy sector,” says the paper, which calls on both the National Audit Office and Ofgem (the Office of Gas and Electricity Markets) to be immediately involved in monthly monitoring of these expenditure flows in the gas and electricity markets.

An unprecedented energy situation

“The paper acknowledges that this is an unprecedented energy situation caused by global events, and consumers will clearly benefit from the government’s price cap, but we must not lose sight of the fact that recipients of the subsidies paid to the energy industry will also benefit,” says lead author Michael G. Pollitt of Cambridge Judge Business School.

“A huge public expenditure has been announced – even if the total amount is uncertain – and this requires clear accountability on behalf of the public.”

“The money will be paid to gas and electric companies, and an accounting of this money should ensure that it is being used to effect sound public policy – including long-term investment in Britain’s energy sector that will help ensure future supply. There has to date been too little discussion of these aspects in the heat of this crisis.”

5 recommendations for energy market policymakers

Beyond the call for strict accounting of the Energy Price Guarantee expenditures, the paper outlines other principles for UK policymakers in these extraordinary times for the energy market:

  1. Get UK energy demand down: “We want to demand less gas, pay less per unit and save on overall energy expenditure.”
  2. Allocate scarce energy to its most socially valuable use: Households now constitute 37% of direct consumption of gas and 45% of daily peak electricity, so “failure to target aggregate household consumption worsens the shortage of gas problem for the entire economy”.
  3. Control the impact of high gas prices on general inflation: “A rising block tariff, with a high marginal price for final units of consumption, is essential to signal to consumers that demand must be reduced to meet supply.” This has the added advantage of giving a bigger percentage bill reduction to those who consume less than average, who tend to be poorer.
  4. Minimise the net energy import bill for the UK: “We need to actively promote energy efficiency, home energy production and additional LNG (liquefied natural gas) export capacity”.
  5. The UK should work with European partners on the underlying problem, as the UK is “effectively still part of the single market in gas and electricity”.

Still time for a ‘proper debate’

“Britain is faced with an unprecedented rise in real domestic fuel bills, so extraordinary action is needed, but this action needs to be taken with foresight and careful consideration,” says study co-author David Reiner of Cambridge Judge.

“The paper draws on lessons from economic history or what we term ‘good energy policy’. While the core principles we outline are largely not controversial in themselves, including reducing demand to reflect scarce energy, there are clear policy implications in how these are implemented and although time is short, it is not too late to hold a proper debate.”

The study

The paper – entitled “The Energy Price Guarantee: what principles should the UK Government apply in thinking about how to implement this?” – is authored by Michael G Pollitt, Professor of Business Economics at Cambridge Judge; David M Reiner, Associate Professor in Technology Policy at Cambridge Judge; and David M G Newbery, Emeritus Professor at the Faculty of Economics at the University of Cambridge.