Liz Truss, UK Prime Minister, has announced an estimated £150 billion package to protect Britain from soaring energy prices – but with just six months to do business compared to two years for households.
Strong state intervention has been accompanied by promises to increase domestic oil and gas production – including mining for shale gas – and to reform energy markets.
An “energy price guarantee” would cap the average household’s annual bill at £2,500 over the next two years. The price guarantee will apply to the energy unit price, so the amount any household will pay will vary depending on how much gas and electricity they use.
The previous maximum for typical household energy use rose to more than £3,500 in October with some predictions suggesting that bills will be higher. £6,000 next year.
The £400 discount on energy bills will be retained and the £150 green taxes will be phased out temporarily, meaning the average household bill will remain at roughly current levels. is 1,971 pounds.
Businesses and government agencies like schools will receive “equivalent support” to households – but only for six months. The details of the commercial plan are less clear.
After six months, Truss says continued support will focus on “vulnerable industries”; The assessment will decide which businesses should be targeted. That assessment is potentially highly controversial.
“Extraordinary challenges call for extraordinary measures to ensure that the UK is never in this situation again,” Truss said.
She also announced a £40 billion liquidity facility to help energy companies deal with volatility in response to their request this week for government help in response to a crisis. potential cash flow crisis. Power producers have faced a dramatic increase in the amount of money they need to sign up as collateral to hedge against future production.
The governments of Sweden, Finland and Switzerland have also announced emergency liquidity support for power companies to prevent a cash crunch from crippling electricity markets and spilling over into the financial sector.
British government officials declined to say what the total cost of the intervention would be, although internal estimates put it at around £150 billion, including £90 billion for the household element. But it could be much higher, with taxpayers massively bearing the brunt of rising wholesale gas prices.
Downing Street said details of the costs would be laid out by prime minister Kwasi Kwarteng at a Small Budget later this month, arguing that a full assessment of the impact on the overall economy was needed.
Truss allies insist the net cost of the package will be “fairly south” of £150 billion, as cuts to energy bills will fall by as much as 5 percentage points off inflation, the cut government debt costs.
Reducing inflation to that level would reduce immediate interest costs by £25 billion this financial year, but won’t have any lasting effects on interest payments.
Truss also wants to negotiate cheaper long-term energy contracts to reduce the cost of government intervention. “The total cost of support for households and customers will be significantly reduced,” said an ally of the Prime Minister, seeking to reassure markets.
The massive government intervention is intended to create certainty until 2024, the year the next election is expected. It would finance the package through borrowing, rather than requiring energy companies to contribute through a higher wind tax – a policy supported by Labor opposition and being pursued by the EU.
Financial markets will be closely watching the actions of the Bank of England following such a massive stimulus.
Although the bank’s chief economist say on wednesday Given that more government borrowing and spending would likely lead to higher interest rates, traders were surprised at the reluctance of Andrew Bailey, the BoE governor, to take a tougher stance. They sold UK property, send British pound fell against the dollarnear the weakest level since 1985.
Truss stressed in a House statement that she would implement longer-term reforms to try to avoid a repeat of the current crisis.
The energy market will be reformed and its regulations reviewed.
Truss also hopes that her planned new long-term contracts with generators will break the link between electricity prices and wholesale gas prices. Some companies that generate electricity using only nuclear or renewable energy are now making huge profits because of the connection to gas prices.
But offering long-term contracts to nuclear and renewable energy companies in return for lower prices now would increase the expected cost of energy relative to the rest of the contract.
Licensing for new oil and gas projects in the North Sea will also be accelerated and the shale gas ban will be lifted – to the satisfaction of Tory rights – but only if the local community supports the idea. this.
Kwarteng wrote in May that even if the mining ban is lifted, it “will take up to a decade to extract enough volume” while causing damage to the countryside.