There is, understandably, a lot of chatter about energy costs and what can be done to prevent them from causing serious hardship this winter.
Unfortunately most of what’s being suggested, not least by politicians (in power and opposition), won’t be much help because of the way that the wholesale energy markets work.
The primary aim of energy producers and the people who operate in the energy futures markets is to extract as much profit as possible from their activities. It is in the interests of all of them to operate what is effectively a cartel in order to keep prices high. Subsidising household energy bills and nationalising energy retailers – our politicians’ favoured solutions – will not change this.
The recent leap in energy prices can partly be attributed to constraints in supply caused by the Ukraine war, but the root causes are our over-reliance on hydrocarbon fuels, and control of production and the wholesale market being in the hands of a few corporations who care only for their own gain.
The current price hikes are as much opportunistic as they are circumstantial, and they affect everything that we buy, everything that is contributing to the cost of living crisis. Energy price increases are the root cause of inflation.
A strategy to ensure affordable energy is, therefore, vital for a healthy sustainable currency as well as the entire economy.
The primary objectives of such a strategy must be to encourage less energy use and prevent opportunist price-gouging.
Things that we can do immediately are:
- cap the standing charge (domestic and commercial) at the actual cost of distribution (i.e. stop energy suppliers from hiding profits in inflated standing charges).
- cap the price of the first (say) 20kWh of energy consumed each day at (say) 10p/unit, and mandate that every kWh metered thereafter must be progressively more expensive using a standard logarithmic scale.
- tax the profits of energy companies according to the number of kWh sold beyond the 20kWh allowance, with the rate of tax increasing in proportion with the price per unit of energy.
- provide a generous tax credit for energy companies for every customer whose home/workplace has been energy-proofed by the energy company to an independently-inspected standard; make the value of the tax credit significantly more than the cost of the kWh tax over the course of a (say) 5 year energy supply contract so that there is good profit in providing energy-efficiency.
- 100% 1st year capital allowances and zero VAT on all materials, equipment and labour used in energy-efficient installations.
- zero capital allowances and punitive VAT on all technologies that do not meet current best standards of energy efficiency.
- apply the basic corporation tax rate to the profits of energy traders/wholesalers where the profit margin is lower than a reasonable percentage; apply 100% corporation tax rate to profits over the reasonable percentage threshold.
These actions will bring down the price of essential energy for vulnerable customers and protect them from future energy price hikes.
They will also incentivise the installation of energy-efficient technologies and adoption of energy-efficient practices in homes and workplaces.
Most importantly they will curb opportunistic extraction of profit from the production and supply of carbon-based energy, and encourage energy companies to move into the supply of energy efficiency as the primary source of their profits.
In the longer term we need to establish a universal Sustainability Tax that replaces most of our current tax code, getting rid of VAT, National Insurance, income tax, corporation tax, and all other taxes that are energy agnostic. A well-designed Sustainability Tax will accelerate the move away from profligate use of inherently expensive hydrocarbon fuels towards sustainable use of inherently cheap renewable energy.