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UK energy price guarantee: what does it tell us about the new government's energy policies?

Date
16 September 2022

Following a major UK government intervention on energy, ICE breaks down the price guarantee and new policies. 

UK energy price guarantee: what does it tell us about the new government's energy policies?
What's next for the UK government's energy policy? Image credit: Alex Y/Shutterstock

Prime Minister Liz Truss outlined plans to ‘get the energy market back on track’ in a major speech to Parliament, outlining the energy policies set to be put forward by her new government.

The key headline from the speech was the energy price guarantee. It’s set to be fixed at £2,500 a year for a typical home for two years from 1 October.

Detail around how this will be paid for was missing. This is unusual for such a major intervention and one of the biggest announcements of its kind in peacetime history.

As a critical part of our infrastructure, a clear understanding of how energy will be financed is imperative.

However, an upcoming fiscal statement from Chancellor Kwasi Kwarteng later this month will focus on costings for this emergency energy support.

What does the energy price cap mean?

In late August, regulator Ofgem raised the energy price cap, pushing average household energy gas and electricity bills to more than £3,500 annually.

This led to demands across the board for urgent policy intervention, prompting the unveiling of Truss’ energy crisis plans.

The government’s introduction of a new price guarantee is intended to protect homes and families and reduce inflation by 5%. This guarantee therefore overrides the Ofgem price cap, having been agreed with energy price retailers.

Short-term interventions

Already struggling businesses will see their energy costs capped at the same price per unit - or kilowatt hour (kWh) - that households will pay under the government's new plans. This intervention will only be in place for six months.

The scheme will be reviewed in three months' time to see if the help should be more targeted towards certain industries.

It could then be extended for vulnerable businesses such as the hospitality sector.

The scheme for businesses is in sharp contrast to the help being offered for domestic customers, which will be in place for two years.

These short-term interventions are welcome and have a key role to play in helping households through the winter.

However, longer-term plan cost reductions, which can be achieved by increasing focus on renewable energy and demand-led measures, are necessary.

Focusing on energy efficiency and demand-led measures would also ensure we meet the UN Sustainable Development Goal 7 of making energy more sustainable and widely available.

What role will renewable energy play?

In Liz Truss’ speech to Parliament, plans were announced to speed up deployment of hydrogen, solar, carbon capture storage and wind.

Renewable and nuclear generators will move on to contracts for difference so prices are no longer set by price for gas. This fairer price will reflect the cost of production.

Speeding up the rollout of renewables is key to our future energy security and a more sustainable future.

This is particularly important from an international perspective as the UK will continue to hold the COP26 presidency until November, when Egypt will take over.

Other nations will be looking to the UK in its role as president to show leadership on management of the energy transition.

Challenges that could prevent the rollout of renewable energy

Oil and gas

Potential stumbling blocks on the road include Truss’ commitment to the acceleration of North Sea oil and gas production.

The government plans to launch a new oil and gas licensing round, expected to lead to over 100 new licences.

Fracking

In a similar vein, the prime minister lifted the ban on fracking (imposed since 2019).

She stated that the government will make sure the UK is a net energy exporter by 2040, using fracking, expanded nuclear and renewable energy generation.

Fracking has huge environmental implications and is unlikely to bring down bills or improve energy security.

As a policy, it continues to poll poorly with the wider public. Just 17% of people support fracking, compared with 90% for solar, according to recent government polling.

With this in mind, it seems clear that fracking will not solve the energy security crisis, and with a high level of public opposition, a greater focus on renewable energy is a stronger solution.

The path to net zero

The positive

The speech confirmed the new prime minister and government’s commitment to net zero by 2050.

ICE previously called for action to co-ordinate net zero across all levels of government. The announcement of a Net Zero Review to be led by Chris Skidmore MP, chair of the Conservative Environment Network, is a positive step in the right direction.

An additional review of energy regulation was announced, intending to fix underlying problems.

The negative

However, the government has contradicted these measures by temporarily suspending green levies – and blocking the path to net zero.

In doing so, it positions green levies as a cause of the cost of living crisis, when what it needs to do is better explain how investment in renewable energy, energy efficiency, and decarbonisation can help solve the crisis.

Green levies include ECO, the UK’s most successful insulation scheme for fuel poverty.

The last time it was cut in 2013, insulation installation rates fell by 90% and thousands of jobs were lost or put at risk.

We need long-term energy security

Looking forward and progressing investment into renewables, rather than backwards towards fracking and fossil fuels, will improve our future long-term energy security.

ICE will continue to work with decision makers across the political spectrum to ensure the public get the long-term infrastructure they need and build trust that it will be delivered.


In case you missed it

  • Laura Cunliffe-Hall, interim lead policy manager at ICE