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Liz Truss To Cap The Wholesale Price Of Gas

September 6, 2022

By Paul Homewood

Via Net Zero Watch:

 

 

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Liz Truss has taken office as Britain’s new prime minister and will on Tuesday finalise a £100bn package to address the UK’s energy crisis by capping the cost of gas to bring down bills for households and businesses.
The measures are the priority for Truss, who was appointed by Queen Elizabeth at the monarch’s Balmoral estate in Scotland on Tuesday after beating her rival Rishi Sunak for the Conservative leadership.
Under the plans being worked on by the Treasury, the UK government would subsidise the wholesale cost of gas allowing suppliers to cap the price of energy to households and businesses, leaving taxpayers exposed to any further surges in energy markets.
Truss’s team said the package would provide protection from the biggest energy shock for decades, preventing mass corporate casualties and keeping millions of households out of fuel poverty. It is not clear whether the caps for households and businesses will be set at the same level.
One senior official confirmed that Truss’s team was drawing up the plans ahead of a potential announcement on Thursday: “There will be a cap, freeze or guarantee on the wholesale gas market,” he said.
She will address the nation as PM for the first time in a speech from Downing Street at about 4pm, after which she will begin to name her cabinet.
The rescue package will be a huge challenge for Britain’s straitened public finances since Truss has also promised tens of billions of pounds of tax cuts. It would be paid back either through consumer bills or taxation over the long term.
The relief package was discussed on Monday night by energy executives and Jacob Rees-Mogg, who is tipped to be the next business secretary.
Capping gas prices would lower wholesale electricity rates. About 40 per cent of Britain’s electricity is generated by gas-fired power plants, which tend to set wholesale rates for the rest of the market, even though other technologies such as wind produce power more cheaply.
In the long term, Truss’s new government wants to decouple electricity prices from gas entirely, a policy the EU is also pursuing.
Brussels is also recommending that EU member states take emergency measures to cap wholesale gas prices.

Full story

 

 

This is actually one of the options I have been considering. It has the great advantage that, by reducing electricity wholesale prices, it puts an end to the windfall profits being made by renewable energy firms and other non=gas generators.

As such it is a much cheaper way of subsidising electricity (and gas) markets than the solutions already put forward by both the government and opposition parties.

It is, of course, also a much simpler solution than radically remaking the energy markets in the way I have recently laid out. Though this is something which will need to be done sooner or later, it would not address the immediate problems.

In the long run, of course, we need to begin boosting domestic supplies of gas.

46 Comments
  1. September 6, 2022 4:25 pm

    Terrible idea. It will just lead to shortages. This is right out of the playbook of every tin pot socialist we’ve ever seen.

    • HotScot permalink
      September 6, 2022 8:48 pm

      You have an alternative I presume…….

  2. September 6, 2022 4:26 pm

    “a £100bn package”

    A drop in the ocean compared to the sums pissed up the wall by Johnson and the oleaginous spiv Sunak throughout the CV19 fiasco.

    Then with a bit of luck the tax cuts will land us on the correct side of the Laffer curve (a concept clearly too abstruse for Sunak) and in a year or two we might approach an even keel…

  3. Stephen Lord permalink
    September 6, 2022 4:27 pm

    It seems there is some hope for common sense.

  4. September 6, 2022 4:51 pm

    It is the least worst option.
    But it must be done in conjunction with scrapping the CC Act and net zero, otherwise its just a sticking plaster for the short term.

    • September 6, 2022 4:59 pm

      Pausing net zero would be easier to do quickly, and it would be popcorn time when “greens” or “scientists” are asked to explain why 2050 is OK, but 2055 is not.

    • Jordan permalink
      September 6, 2022 10:37 pm

      … and those “carbon taxes” should be scrapped.

  5. that man permalink
    September 6, 2022 4:51 pm

    “…other technologies such as wind produce power more cheaply.”

    One would have thought that the FT could get its sums right.

  6. September 6, 2022 5:08 pm

    “even though other technologies such as wind produce power more cheaply”

    And as usual, utterly failing to take into account that every last milliwatt of electricity from the “unreliables” must be covered by a milliwatt of real electricity from continuously maintained hot spinning backup, constituting a duplicate generating network and thus rendering the “unreliables” and all their extra infrastructure an extremely expensive waste of time and energy.

    • September 7, 2022 6:33 am

      Ir’s a triplicate generating network because of solar power.

  7. GeoffB permalink
    September 6, 2022 5:25 pm

    Caps generally do not work. The naturally supply/demand curve limits consumption as the price goes up, which is what is needed this winter. The fly in the ointment in OFGEMs cap is that warmth is essential for life in a typical UK winter and the poor will have to reduce demand below the threshold of survival. In the domestic market I would rather see a staggered price depending on how much is used. For example with electricity abolish the standing charge and charge £x for the first 5kWh per day, £2x for the next 5kWh, then £3x the next 5kWh etc. The more you use, the more you pay (it also rightly punishes those who run heat pumps and have battery cars) Use a similar system for gas. Business users… maybe a similar system, but it might be a good idea not to do anything, because it will increase the pressure to drop the net zero and even repeal the climate change act, then we can fire the the Climate Change Committee, who have lied about the costs of Net Zero. (in my dreams)

    • Slingshot permalink
      September 6, 2022 6:57 pm

      Excellent plan. The problem with standing charges is that no matter how much, little or none one uses, the cost clocks up by the day. Such a system doesn’t encourage thrift.

  8. September 6, 2022 5:29 pm

    Her first act is to do the leftwing socialist thing and start subsidising on a grand scale. Welcome to 21st Century Conservatism to misquote socialist Hugo Chavez with his Venezuelan expression.

    • September 6, 2022 6:19 pm

      Ideology is all very well, but unrestrained energy price increase will close most companies, most schools and kill tens – probably hundreds of thousands of the poor, sick and elderly, this will cause violent unrest on an unprecedented scale.

      So what would you do about it?

  9. It doesn't add up... permalink
    September 6, 2022 6:04 pm

    Market price of gas is say £300/MWh in a winter shortage. If she wants to cap that to £100/MWh then that’s a bill for £160bn p.a. right there. Still leaves wholesale power at £200/MWh.

    They really need advice from very bright energy traders who understand the kinds of ways in which interventions can fail, and with what consequences.

    I guess we need to see the facts rather than the rumours before seeing what needs rethinking.

    • Stephen H permalink
      September 7, 2022 4:10 pm

      There’s reasonable grounds to be optimistic that the bill, although certain to be extremely high, won’t reach £160 billion. January NG is currently around £200MWh, 50% higher than the figure for October delivery. Even if there was a squeeze in the winter during a spell of exceptionally cold weather it should be offset by lower prices in the spring (I recall 5/6 months ago UK NG traded under £50MWh amidst reports of a glut in deliveries).
      I suspect a figure of £80 billion to be more realistic for a cap at £100MWh.

  10. It doesn't add up... permalink
    September 6, 2022 6:08 pm

    The cheapest wind farm at the moment is the two thirds of Triton Knoll that exercised their £94.81/MWh CFD before prices started going up last summer. The last third is getting full market price.

  11. Nicholas Lewis permalink
    September 6, 2022 6:30 pm

    Problem with this is it signals to the market that we will pay whatever it costs as does nothing to make people change behaviour. Basically she is trying to but the 2024 election and it fails the bill is left with whoever gets in if it succeeds she gets live out five years in her fantasy world.

    • September 6, 2022 7:40 pm

      “…does nothing to make people change behaviour.”

      I don’t know where you come from or the kind of people you associate with – clearly they are the more affluent end of the market , but I think you will find that many/most people outside the affluent Southern suburban chattering classes are already doing so.

      Here in the North I can show you people – particularly the elderly, single parents and those on disability benefits who are contemplating turning off their fridges and freezers and even contemplating having their power turned off altogether.

      By some standards my wife and I are reasonably comfortable, but even we are having to cut down in certain areas purely due to the increase in the shopping bills, and we haven’t even turned the gas on for the winter yet.

      I have inter alia COPD, emphysema and diabetes and cannot afford not to maintain a certain temperature, it must be nice for the likes of you who have the latitude to change their behaviour, I can assure you are probably in a minority.

      • Nicholas Lewis permalink
        September 6, 2022 9:13 pm

        Fair point but people are reacting to what they’ve been told is coming towards them if that threat is removed then their behaviours will change hopefully not back to as it was but with some adjustments, where they can make them, staying. For myself we went down a degree last year and didn’t notice it we will be down another degree this year.

      • September 6, 2022 10:08 pm

        “For myself we went down a degree last year and didn’t notice it we will be down another degree this year.”

        You went down a degree, did you?

        Talk about spectacularly missing the point!

        Come back to me when you’ve contemplated whether you can afford to heat and eat on the same day – or even at all.

        You really haven’t the first clue!

      • Ray Sanders permalink
        September 6, 2022 11:08 pm

        Hi Catweazle, very sorry indeed to hear of your health problems. I am from Hull but the family moved down to Kent when I was young primarily for the benefit of my grandfather’s health a former Scottish miner who had lung issues. Firstly look after your health and bugger the costs (easy to say I know) but also from experience try to get as much “fresh” preferably sea air as possible. I noticed my grandad had much fewer flare ups after regular coastal walks in Folkestone in winter despite the bracing temperatures. May seem counter intuitive but a “snot inducing” outside jaunt (with a young me in tow) seemed to help relieve many of his symptoms and the exercise in itself was clearly beneficial. Not only that, getting back home in front of the one warm room fire was so much more satisfying! Take care.

      • September 7, 2022 3:08 pm

        Thanks Ray, I live in a small town high in the Yorkshire Dales, so fresh air is reasonably available.

        I take your point about sea air though, me and t’missus are big fans of it!

    • Gamecock permalink
      September 7, 2022 1:26 pm

      Correct, Nicholas.

      Government action to suppress the price signal will result in people not reacting. Price increase causes people to use less. ‘Capping’ the price by whatever bizarre scheme will result in consumption merrily continuing as if there is no problem.

      And, hilariously, the people are paying for it, anyway. Government removes the beneficial, and keeps the problem.

    • Realist permalink
      September 7, 2022 2:42 pm

      It is not the government’s business to make people change behaviour. But too many politicians, particularly in Europe, even the UK, are trying to dictate people’s choices.

      • Nicholas Lewis permalink
        September 7, 2022 3:07 pm

        Best they not intervene at all then at just let the markets sort it out

  12. David permalink
    September 6, 2022 6:41 pm

    Where does this leave those of us who’ve signed up to a fixed energy plan which may now be more expensive than the market ? One cannot win by prudent planning ahead it would seem

  13. September 6, 2022 7:09 pm

    Of course, it would also not be a bad idea to try to broker a peace agreement in Ukraine, as opposed to scuppering one. It would also be a good idea to cease upping the war rhetoric, sending more military aid and money to Zelensky and seeking to remove the sanctions on Russia which are the reason why Putin has shut down the supply of gas to the EU. Not something I’m confident of Truss doing, seeing as only a few months ago she was encouraging British nationals to go to Ukraine to fight the Russian army.

    • HotScot permalink
      September 6, 2022 8:47 pm

      The problem is Biden doesn’t want peace between Ukraine and Russia, for innumerable reasons, not least that NATO needs an enemy to continue to justify its existence.

      Amongst many other positives Trump delivered was the erosion of that justification.

      Consequently, negotiations can’t even begin when Biden is shovelling arms into the country.

      • September 6, 2022 10:11 pm

        And that is why President Trump – the first POTUS since WWII not to start a war, had to go.

        Well, one of the reasons anyway.

      • HotScot permalink
        September 7, 2022 3:47 pm

        Confusions in responses.

      • Duker permalink
        September 7, 2022 5:06 am

        https://www.usatoday.com/story/news/factcheck/2020/11/01/fact-check-trump-not-first-president-since-eisenhower-without-new-war/6086636002/

        Appears you are wrong , and yes he did intervene militarily in a number of places and narrowly avoided an all out war with Iran and did start the Afghan withdrawal fiasco ( those were to his credit but no Peace Prize !

      • September 7, 2022 3:20 pm

        From your quote:

        “The accuracy of the claim depends in part on the definition of war. “

        And as you appear to be a confirmed TDS victim, I don’t accept yours.

        As to Afghanistan, he negotiated a staged withdrawal, removing all useful materiel and putting any left beyond use, leaving a substantial US military presence at Bagram air base to support the local peacekeepers.

        Biden cut and ran.

        Oh, and I notice you entirely overlook his spectacular success in the Middle East with the Abraham accords.

        And doubtless you believe Obama deserved his Nobel simply for being half black…

      • HotScot permalink
        September 7, 2022 3:43 pm

        Kindly read and understand what I posted before responding with your utter drivel.

      • September 7, 2022 4:53 pm

        I wasn’t addressing you, HotScot!

        President Trump didn’t feed the Democrap’s biggest support group, the military-industrial complex.

      • Gamecock permalink
        September 7, 2022 10:25 pm

        “The problem is Biden doesn’t want peace between Ukraine and Russia”

        True.

        Ukraine is laundering money for the Big Guy. It is common knowledge that Hunter Boy is embedded in Ukrainian business.

  14. Mikehig permalink
    September 6, 2022 10:58 pm

    In all of the caterwauling it does seem farcical for the government to be looking at ways to cut bills which are largely driven by the pricing structures imposed on the industry by government.
    The present system is a bit like a restaurant menu where, no matter that you ordered a burger and chips, you are charged for a plate of caviar!

    The first – obvious – step is to break the link between the cost of gas and the electricity price for all of the non-gas generators. A quick and dirty fix would be to declare force majeure and put those generators onto the rate they were paid over, say, two years of normal operation, plus a bit of escalation. That rate would include the ROCs uplift for those entitled to them.
    The gas generators could be paid that same rate, plus an uplift to cover the increase in the cost of gas since the “baseline” period.
    An added refinement: compel those producers who are side-stepping their CfD contracts to take them up.

    Then there’s the price of gas itself. Why are we paying the “market price” for the gas we buy when most of that gas cannot be traded outside the UK? Again, a fair price could be agreed, based on pre-crisis levels. For leverage, non-compliant companies could be subject to far heavier windfall taxes.

    Obviously there are lots of holes in these simplistic plans but, to this bear of little brain, the concept looks much better than throwing massive subsidies at the present, deeply-flawed system.

    • Duker permalink
      September 7, 2022 5:11 am

      The problem you havent foreseen is the suppliers could leave ‘their’ gas in the ground if the government breaks the supply contracts. Many contracts may be at fixed prices for a time and not all are at the spot price rate , but of course getting a price for a future fixed rate that isnt off the scale would be impossible.

    • September 7, 2022 3:38 pm

      I learned a lot about how the electricity market (dis)functions from a Radio 4 broadcast this morning “More of Less: Behind the stats” (https://www.bbc.co.uk/programmes/p0cysfdh about 8 minutes in) Lots of nonsense about cheap renewable energy but I had never heard of Marginal Cost Pricing before.

      It also debunked the headline that one third of Pakistan was under water, a bit of disinformation from the Pakistani Climate Minister which the BBC happily reported unchecked.

  15. Realist permalink
    September 7, 2022 12:24 am

    Drastically reducing, ideally scrapping all taxes on the essential items of petrol and diesel would help a lot

  16. cookers52 permalink
    September 7, 2022 4:05 am

    Any idiot can solve the energy price crisis, just move the numbers around on the UK balance sheet.
    In the meantime the energy supply shortage is being ignored, we do NOT have enough energy supply capacity as the government actively closed the coal mines demolished all the power stations and dis invested in gas and oil.

    Renewable energy is very good at receiving subsidy but is unable to offer any solution.

  17. Duker permalink
    September 7, 2022 5:30 am

    It will all come right . being British means they are bought up on how to queue

  18. Realist permalink
    September 7, 2022 8:49 am

    Long overdue, not to mention scrapping all the invented “carbon” and “green” taxes, ideally with refunds to everybody forced to pay them for essential items.
    >>promised tens of billions of pounds of tax cuts.

  19. eromgiw permalink
    September 7, 2022 12:30 pm

    If some people are struggling to pay for energy then give them the money to be able to pay their bills. Don’t mess with the market, which upsets the proper signalling that is required for adjusting supply. Same with sanitary products in Scotland, give the money to people unable to afford such, don’t usurp the existing supply chains.

    • Gamecock permalink
      September 7, 2022 10:28 pm

      No. You kill the signal to people unable to afford such to get of their arses and make more.

      • eromgiw permalink
        September 8, 2022 10:16 am

        Lesser of two evils.

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