UK energy support cut as Treasury review to target measures after April 2023

This morning the UK Chancellor of the Exchequer, Jeremy Hunt, announced a series of u-turns on tax and spending commitments made in the ‘mini budget’.

Amongst the reversed tax cuts, the most surprising measure was a decision to limit support for consumer energy bills to a period of 6 months, not the 2 years originally proposed.

___

Matthew Davis | 17th Oct 2022

Targeting support and the impact on high streets

The Treasury will now lead a review into how energy support measures could be continued in a targeted manner after April 2023, when the initial blanket support will come to an end. The IPM and its membership will seek to inform this review with the experience of those who work with organisations and consumers on the high street.

Businesses have had to deal this uncertainty since the original announcement of support for their energy bills which, unlike for consumers, was always intended to be reviewed after 6 months. Now millions of people across the country face the same anxious wait to understand whether energy costs will be met, in part or full, after the first stage of the scheme ends.

As Professor Cathy Parker pointed out in September, surging energy prices have been behind a drop in consumer confidence to their lowest levels since 1974. The energy market and fears about people’s ability to pay their future bills have meant demand for some ‘delayable’ goods has collapsed quickly.

This has come alongside soaring costs of doing businesses, both from energy and other supply chains, meaning that prices have had to be raised or profit margins further cut, at a time when high street demand also needs to be stimulated.

Energy market reform

The latest announcement is a setback for the high street after other promising measures trailed last week, with the government to change the way energy is priced from January, to ensure a fairer deal for energy consumers, particularly those using sustainably-generated electricity. (read more about the changes from BEIS)

As IPM explained in its previous piece, the historical marginal pricing model ties the price of wholesale energy to the most expensive producer (currently, imported gas). In attempting to support energy producers, this model actually ensures high prices for all and, alongside relatively low levels of energy storage capacity, is a fundamental reason behind the UK’s particular susceptibility to changes in the price of gas.

The government has been working with the energy industry to develop details of a new ‘cost-plus-revenue limit’ for generators. This was a measure that IPM called for prior to the ‘mini budget’ to ensure long-term resilience.

As the government outlined, this will “break the link between abnormally high gas prices and how much revenue low-carbon electricity generators receive… allow(ing) consumers to pay a fair amount for their electricity, and ensur(ing) electricity generators are not unduly profiting from the energy crisis caused in part by Russia’s invasion of Ukraine.”

IPM Chief Economist Christian Spence commented on the market reform announcement, calling it “a (rare move) by the government to improve wider market functioning…the devil will be in the detail, of course, but it is broadly a welcome move.”

Understanding the needs of places and people

So there is a positive direction in reforming the energy market and delivering a sound basis for businesses and consumers to manage their energy expenditure.

However, the latest news from the Chancellor will detract from these longer-term measures and could bring more hardship for businesses and individuals in Spring, particularly those on the fringes of any proposed means tested support.

The next few months will be a time to again raise the profile of the economic impact to high streets and those who operate on them, to help ensure that everything is done to protect the viability and the long-term future of places.

__

You can get in touch with IPM if you have a view on the energy crisis from a place perspective and would like to contribute to our response: email IPM@mmu.ac.uk