- The total cost of the EPG depends on a huge range of factors – many of them outside of the government’s control
- To offset this, it can do more to tackle energy use
In a rare piece of good news for the chancellor, the government’s Energy Price Guarantee (EPG) package could be cheaper than anticipated. The government forecasts a figure of £60bn over the next six months, though economists originally priced the total cost of the package at £150bn – equivalent to 3 per cent of GDP.
But, according to projections from research and consulting firm Cornwall Insight, the two-year cost of the EPG could be significantly lower. Though an extreme scenario would still leave the package costing £140bn (as the chart shows), a less severe scenario would render it far cheaper – at £72bn. For context, the potential saving is bigger than the entire corporation tax take, and exceeds 2021 defence spending. But it will only materialise if the government is lucky.
The final figure depends on a mind-boggling array of factors. On the demand side, energy use hinges on the fickle British weather – the National Grid recently warned that, under an extreme scenario, a prolonged cold spell could leave the UK facing rolling blackouts. On the supply side, geopolitical uncertainty, conflicts and ability to import supplies from Europe will have spillover impacts, too.
Much of this lies outside of the government’s control. But the gap between the extreme 'high case' and 'low case' scenarios is huge – and the government’s fiscal credibility has been dented. It can no longer afford to rely on luck.
The EPG was a hugely expensive policy initiative, but met a warmer market reception than the recent “mini” Budget. The Institute for Government (IFG) described it as one of “a series of necessary but suboptimal policies this year in the face of a catastrophic rise in energy prices”. The package is broad-based (rather than means-tested), and its cost concerns have been compounded by the fact that the government has given little indication of how support will be stepped down. Berenberg economist Salomon Fiedler, argued that “in economic terms, the government could have used less money more wisely”.
Matters are complicated by the fact that energy prices are unlikely to be back to normal in two years’ time. Cornwall Insight forecast high energy prices until the second half of the decade – raising the prospect of an additional two to three years of support. CEO Gareth Miller recommends that the government now moves household policy in line with business energy support – reviewing it at shorter intervals and recognising “the wide range of possible price movements that could play out”.
By reducing the marginal cost of additional units of energy consumption, the EPG also gives consumers less incentive to cut down. This is a particular problem in the UK, where properties are among the least energy efficient in Europe. According to figures from the IFG, a home heated to 20 degrees in the UK on a freezing day would lose 3 degrees of heat over 5 hours. The average Norwegian home would lose just 0.9 degrees in the same conditions.
Its analysis shows that a major programme to reduce energy use, including boosting insulation, could reduce aggregate household energy costs by £27bn as early as 2023. But encouraging take-up might not be easy: research suggests that insulation is a ‘credence good’ – meaning its benefits are hard to identify even after it has been installed. These goods are prone to underconsumption, meaning the government would need to take an active stance to encourage take up.
The IFG argues that rolling out a campaign to change boiler flow temperatures could be an even easier win, calling it a cost-free step, to reduce gas use by as much as 10 per cent. But the IFG adds that the government has been unwilling to publicly support this so far – “for fear of appearing nannying”.
A government with libertarian tendencies might well bristle against telling consumers how to heat their homes. Graham Stuart, the minister for climate, insisted last week that there was “not enormous use in telling people to use less energy”, and reports confirm that No10 has rejected a light-touch plan to encourage energy saving. But the government will soon face an array of unpalatable options for shoring up public finances. Encouraging lower energy consumption may be one of the least bad.
