The Government’s Energy Price Guarantee Is Subsidising High Carbon Lifestyles
Thiemo Fetzer, Professor of Economics at the University of Warwick, argues that the Government’s response to the energy crisis is wasting a unique opportunity
Russian President Vladimir Putin’s war in Ukraine, as tragic as it is, has gifted our societies in the West a unique opportunity: to get on a war footing, not just with Putin, but also to finally make decisive steps in tackling the climate crisis. Yet, the UK Government is either missing in action by failing to encourage the public to make energy savings or, through its actions, threatening to make matters worse.
The Government’s Energy Price Guarantee is a clear example of the latter. First, it is a misleading name for a policy. There is no such thing as a price guarantee in economics. We all have to pay the cost of the “guarantee” through higher taxation and more austerity.
The Government keeps repeating a headline number: for the average household, bills for gas and electricity should not be more than £3,000 per year. This would still amount to a near 100% year-on-year increase. But the average household doesn’t really exist (as in, it is not a point that is observed). An average is a statistical construct that combines a lot of information. Any responsible commentator would aim to look at what is behind the numbers.
It is no surprise that the biggest benefactors of the energy price cap are households that consume a lot of energy. But there is a further hidden mechanism which underpins this inequality.
The standing charge was raised for all households in line with the Ofgem October 2022 price cap, while the EPG lowered the unit cost. But the standing charge is paid by all households irrespective of how much energy they consume and so, invariably, the increase in the standing charge is a bigger burden for households who consume less energy. And this happens to be most often poorer households.
So, who are the main benefactors from the alleged “solidarity” embedded in the Energy Price Guarantee? To understand this, it is important to know that the type of property that somebody lives in is one of the main factors driving energy use. So, let us look at an example.
This property above is a mansion that is estimated to consume at least 61,000 kWh of energy per year. This is more than five times as much energy as half of the UK’s households consume per year. This mansion is worth around £5.5m and has 1500 sqm and 7 bedrooms – a type of property that is lived in by people who either have a ton of wealth or have an income well in excess of £150,000 per annum.
Under the Energy Price Guarantee, we all help the people living in this property keep their energy bills down – to the tune of £5000 per year. Contrast this with the 50% of UK households for whom the energy price guarantee provides support of less than £1000 per year.
The Failure to Retrofit
It gets worse. My recent research reveals that some of the biggest energy savings are found in the types of properties that are typically lived in by well-off households who, at least in principle, should be most able to finance the cost of retrofits. There is one stark empirical regularity: higher property prices are strongly correlated with higher energy savings potential from retrofits.
The highest energy savings potential was found in areas with the highest property prices and highest household annual incomes. So, households who technically have the means to retrofit their properties simply didn’t bother to do so because energy was simply too cheap.
Restrictive zoning laws may also make retrofit much more complex and expensive, but it is imperative that these households should have all incentives to bring their energy consumption down in the short and longer-term through retrofitting. And this is where the Energy Price Guarantee sends exactly the wrong signal, as it reduces the burden of the energy prices and may thereby invite people to defer action.
You would think that the Government should encourage retrofitting action? Unfortunately, the announcement of November 17 of a new retrofitting program of around £6bn for energy efficiency measures may have the reverse effect. It is announced only from 2025 onwards. And guess what happens before then? A General Election. In this context, many households may simply further delay action in anticipation of financial support in the future.
This is simply not good enough. It is imperative that civil society, local government and citizens come together to take action into their own hands as it looks like this government will not tackle the climate crisis. We should honour the sacrifice of the Ukrainian people by doing our level best at home to deprive Putin of his ability to weaponize energy and, if, in doing so, we can save the planet – this seems more than a worthy cause.
Thiemo Fetzer is a Professor of Economics at the University of Warwick and Theme Leader at the CAGE Research Centre.