Ed Birkett: The energy price freeze has big risks. A better policy would be targeted aid – and a windfall tax with a difference.

Targeted financial support would be cheaper and pose fewer risks to short-term energy security.

Gas and electricity are lacking throughout Europe. Financial support for households and businesses is part of the answer, especially for groups that cannot pay. As we have seen during Covid, it is difficult for the government to precisely tailor support based on actual household incomes. That’s why Onward decided supporting households through a combination of targeted and universal measures was the best way to get through the crisis, rather than a bill freeze. .

Below The forward plan, the government would give all households a £1,000 rebate on their energy bills, plus an additional £1,000 for those on means-tested benefits, including the poorest pensioners. Families have higher bills, so they should receive an extra £500 per child up to two children. And we thought disabled people, who tend to use more energy, should also get an extra £500.

This scheme would be astronomically expensive, costing £47bn in 2023. But it would be half the cost of a price freeze and maintain incentives for wealthier people to reduce or invest in energy efficiency, helping thereby reducing the risk of power outages this year. Winter.

To help pay for this, we believe there should be a windfall tax on ‘low cost’ electricity generators such as wind, solar, nuclear or biomass. Many of these producers have made huge windfall profits during this crisis, and even with such a tax, they would continue to generate far higher profits than they expected when they built their projects.

Readers may have heard that electricity prices are closely tied to gas prices, even though gas is only used to produce 40% of our electricity. This is because electricity, like all commodities, is priced according to the marginal producer which, in the UK electricity market, is gas-fired power stations.

There are many proposals on how to weaken the link between gas and electricity prices, to ensure that the prices paid to renewables and nuclear reflect their costs rather than international gas prices. But those measures would take time to materialize, so a windfall tax is the best way to sever that bond this winter.

A windfall tax on renewables and nuclear would also be a useful point of difference with Labour, who want more taxes on oil and gas producers but ignore the huge windfall profits made by some green producers because they fear – wrongly – a green reaction.

But financial support is not enough. Liz Truss must reduce demand, diversify fuel supplies and keep European energy markets functioning.

Truss’ energy plan should have two components. Short-term financial support for households and measures to boost long-term energy supply. The focus on long-term supply is welcome, because this crisis would have been less severe if we had had more domestic energy production, whether wind, solar, nuclear or gas; and more insulation and heat pumps for that matter.

But it will take years to build new sources of energy supply. Gas prices are high today because demand for gas across Europe exceeds supply. We therefore also need emergency measures to rebalance supply and demand this winter. Without these measures, breakdowns are more likely.

In the short term, the most practical option is to reduce demand. Governments across Europe have recognized this and are scrambling to reduce energy demand, with households, businesses and public bodies all having to do their part.

Similar measures would be simple to implement in the UK: a national energy-saving campaign, for example, alongside a new baseline efficiency requirement for landlords and housing associations, and saving energy for companies.

There are short-term options for diversifying energy supplies, but they don’t involve fracking, oil and gas, or even renewables. The only substitute for gas this winter is coal and diesel. National Grid ESO has already signed contracts to keep coal-fired power plants available this winter, a good call made by new Chancellor Kwasi Kwarteng while at BEIS. And the government can do more to allow diesel generators to operate more this winter, including quickly issuing new permits and taking the power to suspend certain air quality rules in the event of an emergency.

Finally, there is a risk that European energy markets will cease to function this winter, either because high and volatile prices drive energy companies out of business or because countries cut off energy exports in times of scarcity. extreme.