No handouts, said Liz Truss – except, it turns out, for the one that will cost £70bn, £100bn, £130bn or virtually any large number you care to think of. That’s the point about freezing average bills for 28m households at £2,500, with yet-to-be-defined support for 5.6m businesses on top: the bill can quickly become enormous. You don’t know how high wholesale prices could go – and the other variable is how long the freeze is kept in place.
Still, policy beats no policy. A blunt price cap has the virtue of simplicity. It is easily understood, knocks a few percentage points off the short-term inflation rate (which should save several billion quid in payments on index-linked government debt) and may spare corporate carnage within the hospitality sector, for instance.
The drawbacks, aside from the surge in public borrowing, are also clear. A lot of financial support will go to households that could easily afford Ofgem’s soon-to-be-theoretical October price cap, which would give an annual typical bill of £3,549. Incentives to reduce energy consumption are therefore weakened, which in principle increases the risk of blackouts. But some version of a price cap is now in place in many European countries with a heavy exposure to gas. As we’re told constantly, and correctly, there is no easy answer.
But one hopes the Truss administration, or rather the civil servants, have the operational details nailed down. The retail energy supply companies are, in effect, being teed to be the delivery mechanism for a massive government intervention in markets. One can see at least two big challenges.
First: if the industry’s proposal for a giant “deficit fund” with accompanying loans has been rejected, then cash has to flow to the suppliers very quickly to allow them to keep buying energy. Without government guarantees, immediate liquidity support, or both, the sector would be bust within a week, says independent energy analyst Peter Atherton.
Second: if the government is subsidising the wholesale price of gas, it needs to ensure energy is still being bought efficiently via conventional hedging contracts. As it is, the state could end up underwriting some rotten and inefficient business models in a sector where more than 30 firms have failed already. If it were starting from scratch, the government would probably establish a central buying mechanism – but that is hard to do on the hoof.
Establishing a price cap is merely the first headline step, in other words. But the effect is to switch the entire retail energy supply industry to something approaching semi-nationalised status overnight. The details of how the policy will work on the ground are going to be crucial.
Sewage dumping scandal stench just gets worse
Let’s be clear: Jonson Cox, who in June stepped down as chair of Ofwat after a decade in the post, did not say on Tuesday that water companies lied, withheld information and gave regulators the runaround for years on the vexed question of sewage dumping. But a listener to his testimony to a House of Lords select committee could be forgiven for thinking that is what he meant.
Cox was asked about the joint investigation launched last November by Ofwat and the Environment Agency into sewage treatment plants – an inquiry triggered by water companies admitting that they could be releasing sewage into rivers and watercourses beyond permitted levels. Six companies have been served formal notices for enforcement purposes.
The interesting detail is that the investigation arose from concerns in regulatory circles as long ago as 2015. Ofwat, explained Cox, funded the introduction of new monitoring equipment at that time. “So you can ask: why did that data only suddenly became available in 2021?”
Answering his own question, he replied: “You can imagine that I have spent a lot of time thinking about that. I can’t avoid the conclusion that – it wasn’t quite a whistleblow – but it was put on the table as it became very clear that the rollout of these monitors was going to show very significant non-compliances with the regulations and permits related to wastewater treatment works.”
OK, so the next question is whether the companies knew their plants were breaking discharge limits before the equipment told them. On that score, Cox answered: “Companies did not necessarily need these monitors to know that something was awry. And I have to come back to this point: where does the legal obligation to meet a permit sit? It sits with the company. So did companies know nothing about this? I don’t find that credible.”
The regulatory investigation continues. But the stench of a major scandal grows every time somebody – in this case, the bloke who was supposed to be policing the industry – lifts the lid a little.
