The Tories’ energy package is a bailout for private sector profits

'It is far better to end poverty and bring the energy sector into public ownership. We can’t afford privatisation.'

Liz Truss speaking in the House of Commons

Next week, the government is unveiling a mini-budget ahead of the Conservative Party conference. There will be plenty of spin and backslapping.

Ministers will dwell on the freeze imposed on energy bills and claim that the government is on the side of the people. The freeze is nothing of the kind. It is a bailout of the energy sector which will be banking billions of pounds of profits.

On 26 August 2022, the Office of Gas and Electricity Markets (Ofgem) announced that from 1st October the tariffs for supply of gas and electricity would increase. The net effect is that the annual energy bill for a typical household would increase from the April 2022 average of £1,971 to £3,549. In October 2021, it was £1,277.

The bill includes a standing charge of £273, which every household connected to the grid would pay even if they don’t use any gas or electricity.

Earlier this month, the Prime Minister announced an Energy Price Guarantee, or a freeze. Under this a typical household will pay around £2,500 per year for each of the next two years. There would also be a six-month freeze on business energy bills. A freeze had previously been rejected. Such is the panic that no details have been provided about how the cost of funding the freeze, estimated to be around £150bn.

Why the panic? After all, the government has been happily cutting wages, pensions and benefits, and destroying public services. It has done nothing to curb profiteering by energy companies declaring record profits. It panicked because the greed of energy companies threatened to destroy them as millions can’t afford to pay the bills. In a normal market, suppliers charging exorbitant prices can go bust, but the government won’t let that happen to energy companies. In any case, normal market disciplines don’t apply to energy companies.

In December 2020, 2 million households were in arrears owing £760 for electricity and £605 for gas, or £1,365. By the first quarter of 2022, some 3.4 million gas and electricity accounts were in debt. Some suggested that with energy bills at £3,549 half of UK households would be hit, whilst others estimated that 45 million Britons could plunge into fuel poverty. The success of campaign groups such as “Enough is Enough” showed that millions of people were prepared not to pay. Non-payment of bills would cause massive losses to energy companies and the government obsession with privatisation.

In comes the neoliberal state, which has become a guarantor of corporate profits and launched its £150bn bailout. Even with the freezing of energy tariffs, some 6.7 million households are expected to be in fuel poverty.

The financial value of the arrears is not known but an average of £1,500 could result in bad debts of £10bn, causing a big hole in profits and liquidity of the energy industry.

There is an even bigger problem of a large number of 5.6 million small and medium-size businesses defaulting on their energy bills. More than 70% of pubs would not be able to pay their energy bills. For households, energy companies might try to negotiate a repayment schedule but that isn’t possible for bankrupt businesses. Energy companies would rank as unsecured creditors and recover little, if anything, of the amounts owed to them.

Higher customer arrears or bad debts would have made it difficult for energy retailing companies to pay wholesalers, transmitters, generators and other suppliers, and banks financing the companies and insurance companies underwriting the risk-management hedges. So, the government bailed them out, just as it conjured-up £4bn to bailout Bulb Energy.

Even with price freeze, the household energy bills have nearly tripled within a year. The freeze preserves energy company profits. They will receive the full £3,549 i.e. £2,500 from the domestic customer and £1,049 from the government. If the Ofgem tariff rises, they will receive more. There are no curbs on profiteering by oil, gas, nuclear, coal, renewables or other energy companies.

The wholesale price of natural gas is expected to fall from about €215 (£186) a megawatt hour to below €100 a MWh, but UK energy bills will continue to rise. Suppliers are deterred from offering cheaper tariffs by Ofgem’s Market Stabilisation Charge. Under this, suppliers who win customers with cheaper deals have to pay the old supplier 85% of the difference in tariffs. With captive customers and no parallel electrical transmission systems or gas pipelines, energy business is a state-guaranteed exploitative machine. Normal rules of markets do not apply. Racketeers are bailed out.

The European Union is set to raise £121bn from windfall tax on energy companies. In May 2022, the UK levied a puny £5bn and the government now refuses to levy any additional windfall tax. So, the burden of the £150bn bailout will fall on the people, either in the form of additional taxes and/or government borrowing. Neoliberal logic dictates that government borrowing be accompanied by cuts to public services, wages, pensions and benefits. In the final analysis, people will pay. It is far better to end poverty and bring the energy sector into public ownership. We can’t afford privatisation.

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

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