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Does Truss’s Energy Price Cap Make Sense?

by Noah Carl
12 September 2022 8:00 AM

On September 5th, Putin turned off the Nord Stream 1 pipeline – Europe’s main source of Russian gas. It would not be turned back on, the Kremlin announced, until the “collective west” lifts sanctions against Russia.

With the exception of Viktor Orbán in Hungary, Zoran Milanović in Croatia, Western leaders have shown no interest in lifting sanctions. So Europe will have to make do without Nord Stream 1 for the time being. This is not going to be easy.

In the long-term, Russian gas can be replaced with gas from other sources, or with other forms of energy. But in the short-term (the next 1–5 years, say) Europe will simply have to use less gas. As analyst Sarah Miller noted back in March, “Europe imports more pipeline gas from Russia than the entire LNG export capacity of either the US or Qatar”.

Less gas, of course, means higher prices. In the U.K., around 40% of electricity comes from burning gas. And the fact that we don’t import much from Russia is irrelevant. Britain buys gas from the international market, where prices have spiked due to lack of supply from Russia.

It was recently forecast that, by April of next year, the average British household would be paying six times more for energy than they had been two years before – over £6,000 per annum.

Default tariff price cap for direct debit customers (dark red bars are forecasts).

In response, Britain’s new Prime Minister, Liz Truss, announced that prices would be capped at £2,500 per annum for the next two years, along with “equivalent” protection for business. This bailout will cost an eye-watering £170 billion – about 5% of GDP or what Britain spends on the NHS each year.

Yet critics have panned the idea, which does little to address the root cause of the crisis: scarcity. In the absence of Truss’s price cap, households would have a strong incentive to conserve energy, since they’d be facing the full market price. But now that incentive is far weaker.

By April of next year, households will be paying only 40% of the cost of their energy bill – with the rest being covered by the taxpayer. Of course, households and taxpayers are mostly the same people. Which reminds one of Frédéric Bastiat’s description of government as “that great fiction by which everyone tries to live at the expense of everyone else”.

This isn’t quite true, however, as Truss plans to borrow the money. So what’s really happening is that younger Britons are footing the bill for older ones – via higher future taxes.

And because Truss’s price cap removes much of the incentive to economise, it not only burdens taxpayers with more debt, but markedly increases the risk of blackouts.

There’s another snag. If we get a particularly cold winter, market prices could go even higher – putting the government on the hook for much more than £170 billion. As analyst Javier Blas notes, “the UK Treasury effectively took the biggest short position ever in the gas and electricity wholesale markets, without a hedge”. Was it the right move? “No, no, no,” he says.

A better proposal would be to leave the energy market intact, while providing financial support to households and businesses. This way, there’d still be a strong incentive to economise.

Liz Truss likes to model her outfits on Margaret Thatcher, but she appears to have modelled her energy policy on John McDonnell. (The self-described “socialist” has called for strict price controls on energy.) Will Truss turn out to be another Prime Minister, like Boris, who pays lip service to the free market, while doing her best to undermine it?

Tags: Energy price capJohn McDonnellLiz Truss

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34 Comments
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JohnK
JohnK
2 years ago

Perhaps we are paying for the relatively low cost investment in the past, achieved by building gas fired power stations, like Didcot B, next door to the old coal fired one. Reminds me of another energy source that was popular in the trade for a while – heavy oil. Back in the early 1970s, I was taken on a day trip to the brand new Pembroke PS, which burned heavy oil. They (and my old man) were quite proud about it all, compared with coal fired ones – but not long after that the difficulties with Saudi Arabia occurred with the oil price ramping up. We came pretty close to fuel rationing on the roads etc. So that place never made a profit, a cynic might observe.

Re the winter weather prospects, remember that last Autumn and Winter were unusually mild, and it’s quite likely (notwithstanding the output of the climate scaremongers) that we will end up using more heating than last year, even if the prices were the same.

30
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TheGreenAcres
TheGreenAcres
2 years ago

A better solution would have been to cap only a certain amount of kw/h at the reduced rate with anything over that charged full market price.

Admittedly this would be more difficult to achieve for commercial tariffs as opposed to domestic ones due to the much wider range of business needs but at least you give everyone a safety net in a more fair and equal way.

However when it comes to our domestic energy security the proposals I have seen do not go far enough. The removal of the blanket ban on fracking for example, only puts the decision back to local authorities. It mentions ‘where there is local consent’. Unfortunately we know full well that any authority considering fracking will receive the most sever backlash from (largely non-local) activist groups. It’s simply not good enough.

39
-1
JohnK
JohnK
2 years ago
Reply to  TheGreenAcres

A few years ago, my domestic gas supply was priced the other way round. nPower charged more for small amounts, with a reduced unit price beyond that. At present I’m on a fixed rate per unit, though, with a different firm. Just received the latest bill, with new post October prices in it. It will be 14.88p/kWh thermal (it was 4.17p last year, so a 257% increase).

11
0
wokeman
wokeman
2 years ago

The issue is lack of supply and lack of suitable storage infrastructure due to investment being misdirected at unreliables (renewables). The net zero zealots also over complicated the grid with all these connections to their beloved bird chomping eco crucifixes. You won’t fix this supply issue by bailing out consumers ad infinitum.

Last edited 2 years ago by wokeman
61
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JohnK
JohnK
2 years ago
Reply to  wokeman

Taking a more balanced view, there is nothing wrong with investing in renewable sources as long as one pays for “insurance” to maintain adequate supply as well. If you don’t pay the premium, you’re gambling – and that could be part of the problem, along with the financial arrangements for various types of generation.

E.g. doing the sums to justify a new 2000 MW station that is not going to do much, most of the time, would be very different compared with the old days. After all, over the next 30 odd years one would be paying the wages for those who deliver nothing physically, but are acting as insurers, in effect.

6
-2
wokeman
wokeman
2 years ago
Reply to  JohnK

I don’t think there is any argument for renewables at all, I say that who worked in the sector creating contracts for large commercial users. Even if one believes carbon is the devil, which it isn’t, supplying base load energy from intermittent sources is barking mad. In energy you want reliability if it’s base load, and to balance the grid you want certain sources that can be put online at low cost when required, such as pump storage. Renewables meet neither of these requirements and are just an uneconomic cost borne by consumers.

Last edited 2 years ago by wokeman
55
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RJBassett
RJBassett
2 years ago
Reply to  JohnK

Yes, there is something wrong with”investing” in renewables and that is that you are not investing, you’re spending. If it was an investment the criteria would be looking at a market where there are not differential prices for renewable versus efficient sources of electricity; that’s a false differentiation.

Then you would look at the competitive position of your business that is selling an undifferentiated product, electricity, in terms of its total output and cash generation after adjusting for transmission costs to determine the likely return.

In the absence of government capital subsidies, mandates and price supports, few, if any renewables are competitive with gas.

Renewables are a bet on the level of stupidity exhibited by politicians and bureaucrats, not a investment in a market based product. Betting on the stupidity of politicians, pundits and bureaucrats is a pretty safe bet.

5
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transmissionofflame
transmissionofflame
2 years ago

It makes sense politically, not in any other way. If it means we keep Lockdown Labour out, I guess it’s better than nothing.

13
-2
Occams Pangolin Pie
Occams Pangolin Pie
2 years ago

So some pragmatic diplomacy with big bad Russia would be helpful. What an insane idea.

66
-1
Occams Pangolin Pie
Occams Pangolin Pie
2 years ago
Reply to  Occams Pangolin Pie

FYI: Accessing your site this afternoon is remarkably slow. Not a problem with other sites.

4
0
huxleypiggles
huxleypiggles
2 years ago
Reply to  Occams Pangolin Pie

Glad you put that up. I am having similar problems.

3
0
JohnK
JohnK
2 years ago
Reply to  huxleypiggles

I noticed that as well. However, it’s often not obvious as to where the problems. I’ve had several short term breaks in service (e.g. 6 minute just now), and not long ago a 4 day one, until the BT Openreach firm came along to repair a local cable fault. They seem to have a lot of faults due to deteriorating buried cable at least.

4
0
DanClarke
DanClarke
2 years ago

The younger generation have always paid for the past, we only recently finished paying for WW11 and there are others who are still looking for angles for us to pay up from hundreds of years ago. Net zero was a crazy idea, to rely on others to polute and supply us is mad

31
0
stewart
stewart
2 years ago
Reply to  DanClarke

That is how we know all these left wing projects – net zero, anti-racism, LGBT rights etc – are just quasi religious con jobs.

Their activists relentlessly attack the non-offending or least offending and have nothing much to say to the absolute worst offenders.

You’re never going to see any environmentalists causing disruption in China or LGBT activists acting up in Saudi Arabia or Iran – you know, places where one might actually. agree a bit of work needs to be done.

25
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Marcus Aurelius knew
Marcus Aurelius knew
2 years ago

They’re all the same, these politicians: incompetent, arrogant nincompoops, products of an education system which never tells anyone they’re wrong.

42
-1
stewart
stewart
2 years ago
Reply to  Marcus Aurelius knew

Except those that are actually right.

They have no problem correcting people who point out there are two genders, or white people who insist they aren’t racist.

10
0
MIKE HAGGAR
MIKE HAGGAR
2 years ago

If Truss was the real deal, she’d pull our money and artillery out of the hands and banks of Ukrainian oligarchs. She’d immediately green-flag an off-shore illegal-immigrant holding base and withdraw ALL immigration permissions while they get to grips with cracking down on those responsible for driving the movement of people (not easy because she’d ultimately be dealing with the World Bank and a Mr György Schwartz).

She would immediately stop the administration of gene therapy and launch an investigation into the effects of the clotshot, and find medical solutions to its affects. She’d launch a criminal investigation into those who deliberately destroyed the UK economy over the last few years, printing money to buy out the media, to manufacture the terrifying and grotesque advertising on every medium. She’d extend the investigation into the legality of lockdown and the effects on business and individuals.

She’d purge our institutions of communist infiltration – otherwise known as the misnomer ‘Woke’ nowadays. This would see police being suspended/sacked for showing any political allegiances and she’d she them reverting back to wearing uniforms and driving vehicles without any political symbology. No more diversity/equality/BS training whilst she launches a huge police recruitment with a focus on dealing with crime on street-level.

She’d bin the online ‘safety’ bill and protect freedom of speech and protest in a binding bill of rights. She’d “get Brexit done” – and I don’t mean the tepid one-foot in-one foot out Pfeffel ‘Brexit’, celebrated by faux right wing in the MSM. She’d rid us of the fake protest movement of green extremism and seek to bring criminal charges to those who fund them.

She’d completely reject the Green Agenda, permanently taking the levy out our bills.

She’d plunder the pharmaceutical industry to recover the money ploughed into their coffers via the covid fraud. She’d kick them out of the UK, reversing the previous government’s embrace.

Hancock, Savij Jabid, Witty, Vallance, Van Tam, (to begin with) would be arrested under ‘suspicion’ of so many terrible crimes, it would be hard to know where to start listing them.

Finally – for this list at least – she’d trigger criminal investigation into Bill Gates and his extortion in the UK.

Above is only brief and merely a pinch of the damage done/being done to the UK and its people. Such is the rot set in by a hostile alien ideology over many decades, so influential with such a tight grip on every lever of power – I think it’s fair to say in Liz, I do not Truss. We’re likely witnessing nothing more than pressure-tapping with her promises of a return to actual conservatism unlikely to bring about real meaningful positive change.

49
0
huxleypiggles
huxleypiggles
2 years ago
Reply to  MIKE HAGGAR

Terrific post 👍

7
0
Jonny S.
Jonny S.
2 years ago

An alternative veiw as to why gas prices are so high involving short term contracts with the European commission and the involvement of spectulators in the market.

https://ehden.substack.com/p/energy-market-built-to-fail

10
0
huxleypiggles
huxleypiggles
2 years ago

Involved discussion is pissing in the wind when it concerns sorting out national energy supply. I posted some days ago that Truss could sort uk energy overnight if she wanted to.

The North Sea has to be opened up to oil and gas production – IMMEDIATELY.

Fracking has to be given the GET GO – IMMEDIATELY.

A Nuclear building programme must start first thing tomorrow morning.

A programme for re-opening the pits must be in place by the end of the week and sod any whingers.

In order to provide funding for the above measures ALL subsidies to companies fannying about with renewables will be cancelled with IMMEDIATE effect. Unfortunately King Chucky will have to whistle for his seabed rentals.

And we’re off…

If I can provide a workable way forward in a few sentences the fact that Truss has done F A simply confirms that she is not working for the people of this country and has other masters.

Truss is a traitor.

48
0
MIKE HAGGAR
MIKE HAGGAR
2 years ago
Reply to  huxleypiggles

I made a similar comment here 2 hrs ago but it seems to have been yanked. Maybe because I listed those who need to be criminally investigated – who knows – but the same sentiment is regularly aired on Live TV by GB News. Here, Free Speech Union runs a site that you have to pay to comment on. If they disapprove of the comment, you won’t get to know why or be given an opportunity to amend if you agree.

Poor form chaps.

20
0
huxleypiggles
huxleypiggles
2 years ago
Reply to  MIKE HAGGAR

Not happy to read that Mike. Post if there are any more occurrences.

9
0
stewart
stewart
2 years ago
Reply to  huxleypiggles

A programme for re-opening the pits must be in place by the end of the week and sod any whingers.

I’m all for bringing on all the energy resources we can. But reopening the coal mines I just don’t see. Not because I think we shouldn’t but because in a place where it’s a struggle to find people to wait tables, your’e going to struggle to recruit coal miners.

The irony of it. 40 years ago, there were people literally fighting to be able to continue being coalminers. Now, you’ll probably have to pay someone like a banker to subject themselves to that job. Even then you’ll struggle.

10
0
Marcus Aurelius knew
Marcus Aurelius knew
2 years ago
Reply to  stewart

Yes. And then, to continue mining coal at the wages the unions were demanding would have continued to bankrupt the country and hence to zero wages. Now, the country is bankrupt and apparently nobody wants to mine for our own energy at any wage! Crazy. No hope for humans.

The only people knowledgeable enough and willing to get the coal mines up and running again will be the immigrants… again.

Last edited 2 years ago by Marcus Aurelius knew
4
0
VAX FREE IanC
VAX FREE IanC
2 years ago
Reply to  huxleypiggles

Well said HP if only eh?

0
0
Free Lemming
Free Lemming
2 years ago

These people aren’t stupid (although I do have my reservations about Truss), that’s the mistake that’s too often made. I’m sure they know exactly how this is likely to play out. More debt, more financial ruin – a few more steps closer to where they want to be.

22
0
huxleypiggles
huxleypiggles
2 years ago
Reply to  Free Lemming

The intention is to bankrupt the country and the citizens at the same time.

Once people are in debt and can no longer afford to live the ‘caring, sharing, government’ will step in and offer to remove all our debts in exchange for signing over all our personal assets. Obviously a UBI will be offered in return.

“You will own nothing but be happy.”

31
0
Steve-Devon
Steve-Devon
2 years ago
Reply to  huxleypiggles

Elizabeth Truss is said to be a Chartered Management Accountant, so either she did not pay much attention to her training or she knows exactly what she is doing and is deliberately sending the country into a black hole of financial oblivion in order to rebuild us as a miserable communitarian Soviet social credit society. The policy relies on energy prices coming down but the policy itself will be instrumental in driving them up so that by 2024 the majority of our energy needs will be funded by the state. If they also manage to engineer a food crisis we will end up eating Truss Cockroach Burghers and Duchy Survival Biscuits whilst huddled round our state issued barely functioning heat pump run on state issued energy.
It’s life Jim but not as we know it, or want it! When does the UK get a Ron Desantis or a Harriet Hageman to challenge this nightmare future?

20
0
huxleypiggles
huxleypiggles
2 years ago
Reply to  Steve-Devon

Well said. Agreed.

4
0
JohnK
JohnK
2 years ago
Reply to  Steve-Devon

And we might end up paying through the back door via various forms of tax revenue on other transactions, or higher inheritance tax or whatever, to make it look better at the next election.

Also, consider the educational background of the Chancellor. What they seem to be short of is competent industrialists overall.

3
0
Cane Corso
Cane Corso
2 years ago

There is no shortage of peak energy sources (gas and oil). The artificial shortage is caused by Russian sanctions. End them and the world may become sensible again. But this has been a wake-up for all those who believed in unreliables, JIT supply and ignoring nuclear for base generation. The late, great Jim Lovelock was sounding the alarm on the latter years ago.

15
0
Roy Everett
Roy Everett
2 years ago

Germany’s politicians seem to believe in the magic Yo-Yo nuclear power station, which can be turned up or down in minutes depending on whether the Sun is shining or the wind blowing. Its engineers are quietly pointing out that it takes days to turn nuclear power stations on, and that the lead time on new fuel rods for the mothballed ones is several months. Idiotie durch Technik.

Last edited 2 years ago by Roy Everett
10
0
JohnK
JohnK
2 years ago
Reply to  Roy Everett

Quite. Historically, in countries with a certain proportion of operating nuclear stations, variable prices were used to encourage a reasonable base load to allow them to run continuously as much as possible. The old (and still valid) economy 7 tariff did that, to some extent. However, if you’ve been keeping an eye on something like this site: https://grid.iamkate.com/ you’ll notice that the percentage output from them has deteriorated quite a bit. It still shows a fairly stable line in the “All time (yearly averages) graph for the “other energy” – which is mostly nuclear & wood fuel. After all, several of the older stations are now being decommissioned, or long since “cocooned” for parts of the reactors – e.g Berkeley, Oldbury, Hinkley Point A, and loads more.

2
0
Martin Frost
Martin Frost
2 years ago

The energy prices had to be capped. Even with targeted financial help the prospect of a six fold increase would have caused panic and led to a deep recession. The risks are still there. The UK is already heavily in debt from the Covid overreaction. We are now suffering the consequence of a lack of long term econonic planning.I wonder what new crisis is lurking just around the corner?

3
0

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