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Energy crisis 'No. 1 challenge' for Liz Truss, UK's new prime minister

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Liz Truss, the U.K.'s new prime minister, at a leadership campaign event in Belfast, Northern Ireland, next to a boat used to transport crew to offshore wind farms.
Source: Pool/Getty Images News via Getty Images

As Liz Truss takes office as the U.K.'s new prime minister Sept. 6, the world's fifth-largest economy remains a notable outlier among European nations in the scale of its response to the energy crisis. But measures to contain soaring household bills are said to be on the horizon.

Truss, formerly the U.K.'s foreign secretary, was selected to replace Boris Johnson as leader after a vote of Conservative Party members. The tightly contested leadership race saw her receive 57% of the votes, beating former Chancellor of the Exchequer Rishi Sunak.

Truss inherits the leadership of the U.K. at a critical juncture. In a brief victory speech Sept. 5, the new prime minister pledged to "deliver on the energy crisis, dealing with people's energy bills, but also dealing with the long-term issues we have on energy supply."

Wholesale energy prices have risen to all-time highs, driven by Russia's invasion of Ukraine. The average U.K. household's energy bill will rise to £3,549 per year from October, according to energy regulator Ofgem, up from £1,971 in April. Further increases are likely in 2023.

The energy crisis is the "number one challenge facing the new prime minister," Ed Birkett, head of energy and climate at U.K. think tank Onward, said in an interview. "We really need to treat this as an emergency situation."

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Freezing energy bills

In a bid to combat rising bills, Johnson's administration pledged a £400 energy discount for all U.K. households, to be paid in six monthly installments from October. But even with that grant, 80% of households will be in fuel poverty by January 2023, according to research by the University of York, England. Fuel poverty means having to spend more than 10% of net income on fuel.

Under pressure to announce stronger measures, Truss is expected to unveil a plan to freeze consumer bills in one of her first actions as prime minister, The Times of London reported Sept. 4. While the exact details of the policy are unclear, "I think that's an option," Andrew Moulder, senior European utilities analyst at CreditSights, said in an interview.

"Whatever is put in place, the utilities still need to cover the costs that they're incurring," Moulder said. Energy companies, and ultimately consumers, could be asked to pay for the bill freeze over time via government-issued low-interest loans, the analyst added.

Freezing bills would be costly at about £85 billion per year, according to research by Onward more than the entire cost of the U.K. government's COVID-19 furlough program. It would also be "irresponsible" to freeze bills for wealthier households, Birkett said in an interview.

"In an ideal world, you'd provide support tailored to income level," Birkett said, acknowledging that doing so would take time. Instead, the researcher said the government should provide £1,000 to every household in 2023, with additional payments for those on means-tested benefits, with children or with disabilities, and accelerate the £400 rebate to be paid in full by Christmas.

'Special situation'

Another option at the U.K.'s disposal is a windfall tax. The government already announced additional taxes on oil and gas profits, using the proceeds to support struggling households. But given the rising prices, there may also be justification to widen the scope of the tax to electricity generators.

"We're in a special situation and some companies are really making far more than they would in normal circumstances," Moulder said, referring for instance to nuclear, hydropower and renewables generators. Even there, a one-size-fits-all approach will not work because some providers will have hedged future output at current forecasts and will not be making excess profits, the analyst added.

Some groups have called on the government to offer existing low-carbon generation assets the chance to exchange the current high but volatile wholesale power prices for guaranteed contracts at lower but fixed rates.

Such a plan is being advocated by the U.K. energy industry. Trade association Energy U.K. said it could reduce household bills by up to £18 billion per year from 2023, while Dan McGrail, CEO of RenewableUK, said it would help "break the link between the exorbitant cost of gas and the price of electricity."

Birkett said the idea could become interesting when market prices start to normalize, but added that windfall taxes are the "better way to go in the short term" while prices remain at record highs.

"The government is in an incredibly weak bargaining position at the moment," Birkett said, adding that generators may push for contracts at prices that, while lower than today's market, might still look a bad deal in a few years' time. In this scenario, "all you're doing is locking in that windfall and receiving it over a longer period."

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A demonstration in August organized by the U.K.'s opposition Labour Party, which claims the government has failed to act on the cost-of-living crisis.
Source: Leon Neal/Getty Images News via Getty Images

'Strong market signal' for net-zero

During the party leadership campaign, Truss committed to "doubling down" on the U.K.'s drive to achieve net-zero emissions by 2050. She also questioned the role of solar farms, suggesting they negatively impact food security by taking up agricultural land.

McGrail called on the new prime minister to "recommit to the ambitious targets" set out in the government's energy security strategy in April — including its goal to reach 50 GW of offshore wind by 2030. Renewables will "move us further and faster toward energy independence," McGrail said in a statement.

Truss is expected to appoint Business Secretary Kwasi Kwarteng as chancellor of the exchequer and replace Kwarteng with Brexit Opportunities Minister Jacob Rees-Mogg, according to numerous media reports.

Rees-Mogg's anticipated appointment at the Department for Business, Energy and Industrial Strategy has drawn particular criticism from opposition parties. The minister has previously expressed concerns about "climate alarmism" and is also in favor of fracking and continued exploration of oil and gas in the North Sea, the Financial Times reported Sept. 1.

Market observers noted that while Johnson had made net-zero a priority for his government, introducing ambitious targets for renewables and reducing emissions, some of the short-term delivery mechanisms were lacking.

Still, an about-turn under Truss' leadership is unlikely given public and parliamentary support for net-zero, according to Peter Chalkley, director of the Energy & Climate Intelligence Unit, a think tank.

"There is no electoral calculus whereby trying to row back on net-zero works," Chalkley said. If anything, "there is a strong market signal to shift quicker to net-zero in the current gas crisis," the researcher added, pointing to the improving economics of renewables, heat pumps and electric vehicles.

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