To the family choosing whether to heat or eat, the energy cap isn’t ‘fair’ at all

When the nights begin to draw in this winter, millions of homes across the country will find themselves left out in the cold thanks to a looming energy price surge.

Already, 3 million UK households are struggling to pay their energy bills. Another 400,000 families are expected to fall into fuel poverty as the temperature drops, bills rocket, and the last elements of the government’s furlough scheme wind down.

This week the energy regulator, Ofgem, is expected to raise the cap on energy bills to its highest-ever level after one of the steepest increases in global gas prices in recent decades. This winter could see the average winter dual-fuel energy bill soaring by more than £150 to £1,288 a year after the UK’s gas market reached 16-year highs last week.

In theory, the energy cap sets a “fair” rate for the 15 million homes that rely on default tariffs to pay for their gas and electricity by reflecting only the costs faced by energy suppliers. In many ways the scheme has been hugely successful. The government estimates that major energy companies may have overcharged customers by up to £1.4bn a year before the cap was put in place. The carefully applied methodology means there is no room for rip-off prices or profiteering.

But “fair” is not the same as “affordable”. And there is nothing fair about being forced to choose between whether to heat your home or pay for food.

As the post-pandemic commodity-market boom prepares to send shivers through British living rooms, many senior figures in the energy industry are beginning to wonder whether the price cap goes far enough to protect hard-hit families.

The energy price control may have provided a voter-friendly sticking plaster for the problem of fuel poverty, but it also sets a low bar for success. To prevent a family from being ripped off is not quite the same as helping a family to thrive.

One answer may be the introduction of a social tariff scheme, which sets an energy price at a discount to Ofgem’s cap. It could build on the success of the government’s “warm home discount” – which offers poor households a £140 discount on energy bills every winter – and the “energy company obligation”, which offers improvement grants for the UK’s draughtiest homes.

The problem has never been a more pressing. The rising number of UK households in fuel poverty is an indictment of the government’s failure to smooth out many of the legacy fault lines in the energy market. And the gaps will only become more visible as the need for climate action moves into Britain’s houses.

The questions smouldering at the heart of the home energy debate are: how do we pay for the cost of cutting emissions from our gas-heated flats and houses; how can we overhaul our draughty housing stock to use less energy and emit less carbon; and how can we make sure that no one is left behind?

The government’s response has consisted of delayed strategies and fumbled policies. Its plan to cut emissions from homes and buildings was deferred until after the summer, and its landmark home energy efficiency scheme was scrapped after only six months. Meanwhile, the early work of government officials on the future of home energy will do nothing to warm the dwellings of hard-hit families in the months ahead.

Bungled policies have left the vulnerable exposed. For too many people this winter, a price cap will provide only cold comfort.

Sunak and the Bank must not be shy of acting in concert

Almost pound for pound, as Rishi Sunak announced one pandemic rescue package after another during 2020, the Bank of England printed the money needed to finance them.

Such was the size of the central bank’s exercise in money creation, better known as quantitative easing, that by the end of last year it had committed itself to injecting £895bn into the UK economy, with most of the money spent purchasing government bonds.

There were accusations that Threadneedle Street was acting in concert with the Treasury and so jettisoning its independence. Officials angrily denied there were any back-channel agreements. In truth it was clear, without so much as a phone call, what each party needed to do.

A new report by the Resolution Foundation will say both must still dance in step even when the recovery is in full swing. Writing before the Bank’s monetary policy committee meeting this week, when policymakers are expected to keep interest rates on hold and maintain the bond-buying programme, the thinktank will argue that acting together will avoid spooking financial markets.

First, it says Sunak should follow the lead of the European Central Bank and raise the inflation target – in the Bank’s case, from 2% to 2.5%. This would ease the need for an early rise in interest rates to tackle growing inflationary pressure in the British economy.

Second, Sunak should be prepared to pull back his own plans to tighten fiscal policy. This would give the Bank room to reduce its bond-buying programme, something it could do incrementally, without startling mortgage holders and indebted businesses with an interest rate rise.

The idea that central bank independence should be a cover for feverish coordination with the Treasury is not new, but is surely appropriate now, and for some time to come. The markets are febrile, and they need managing.

Taxpayers’ money is just the ticket for FirstGroup

A strange side-effect of Covid was seen when one of Britain’s biggest transport operators, First Group, announced results last week. Running buses and trains through a pandemic, with passenger numbers in tatters, appears to have left its balance sheet stronger than ever. For the first time in almost a decade, it is looking to pay out dividends to shareholders – to the tune of about £500m.

That is largely down to the sell-off of First’s two main US divisions in a £3.3bn deal. But its £100m-plus profits for the first half of 2021 came from British bus and rail – underpinned entirely by government top-ups on lost bus revenues, and new rail contracts that have rescued First from ailing franchises.

National Express, which also received support for its bus operations through the Covid support grant, but saw its coach business suffer, has long since quit rail – and reported a £22m loss last week.

Little wonder some question the newly vibrant finances of First, from a turnaround plan or otherwise. In the small print, it announced that dividends would be bumped up with another £50m, as a result of a forfeiture by the Treasury. That was the additional figure First expected to have to pay for the end of its loss-making TransPennine and South Western Railway rail franchises – businesses won on optimistic promises from which it is now released.

After the government cancelled franchises at the start of the first lockdown, FirstGroup continued to run the same networks for a guaranteed margin under emergency contracts which, as the Commons public accounts committee complains, are not open to scrutiny.

Firms funnelling dividends after the state has underwritten losses, paid for furloughed staff, and issued a £300m Covid loan (even if now repaid) will stick in the craw. Taxpayers should undoubtedly support public transport operators in the recovery, and in their transition to a greener future. But they don’t want to be taken for a ride.