As gas prices soar, the UK needs a real energy plan

As Russia’s war with Ukraine plods on, a pincer movement is advancing toward UK households this winter. The price of natural gas has doubled since April and is about seven times what it was a year ago. High gas prices boost electricity costs, which in turn push up the price for manufacturing inputs, food and pretty much everything else. With demand for energy set to rise for the colder months, the financial pressure on millions of British households could soon prove intolerable.
The UK energy regulator said that the typical bill for household gas and electricity would rise from an already steep 1,971 pounds ($2,308) this month to more than 3,500 pounds in October — and forecasters are talking of bills well above 6,000 pounds by next spring. For many, such costs are completely unaffordable. Nearly 10 million Britons say they’ve skipped a meal or cut down on portion sizes because of rising prices; some 6.7 million have had to seek help from a food bank or charity.
War-related sanctions and tightened energy supplies are the primary causes of this crunch. With about 80% of its homes reliant on gas for heating, Britain is heavily exposed to increased prices even if it doesn’t import much from Russia. Brexit has also contributed to food-price inflation, and a falling pound has made things worse. Meanwhile, taxes have risen to their highest level as a share of national income in decades, squeezing households further.
None of this should make Britain withdraw its support for Ukraine or drop its commitment to net-zero carbon emissions. But the winner of the Conservative Party leadership race (and hence the next prime minister) will need to deliver both short-term relief for taxpayers and longer-term reforms to bolster energy security and deliver growth.
An emergency budget should be the first order of business. A support package approved in May was substantial, but it has since been overwhelmed by the rise in energy, food and other prices. To be sustainable, any new relief should be targeted at the neediest households, including pensioners. To avoid perverse incentives, it should directly support incomes, rather than attempting to meddle further with energy prices.
The government will also need to accelerate contingency plans for a full Russian cut-off this winter. That should include continued stress tests on industries that may need to curtail energy use, new incentives for households to cut back during times of peak demand, and a viable plan to restore gas-storage facilities that were recently (and ill-advisedly) retired.
To be effective, such measures must be paired with a longer-term strategy focused on energy security, decarbonization and economic growth. Britain has a net-zero target, but little clarity on how it will get there. It needs broader investment in clean energy, including a plan to encourage the widespread installation of solar panels for electricity generation. It needs to reverse low levels of investment in human capital and infrastructure that have been a drag on growth. Rather than pandering to anti-immigrant sentiment, the next government needs to make the positive case for importing more workers to start businesses and fill jobs from hospitality to nursing.
Similarly, while much of the leadership race has been spent debating small-scale tax reforms, such as postponing a rise in corporate rates, a harder conversation about why government services are both expensive and dysfunctional is long overdue. Finally, responding to the cost-of-living crisis also means avoiding policies that, however attractive politically, will ultimately prove counterproductive.
—Bloomberg