As we leave winter and enter spring, we ask whether high energy prices are here to stay
Giles Wilkes
People in the Treasury must be producing advice, saying can we keep these bills high, people are now used to them, and they're encouraging people to do the right thing vis-à-vis the climate.
Paul Johnson
Hello, and welcome to this edition of the IFS Zooms In. I'm Paul Johnson, director of the Institute for Fiscal Studies, and today we're going to discuss energy prices, something that matters to all of us. What's happening to them, has government done enough to support people, and will energy prices continue to place quite such a burden on household and business finances in the year ahead?
Joining us today are Heidi Karjalainen, who's a researcher here at the IFS, and Giles Wilkes, who's a senior fellow at the Institute for Government and a former special adviser to Theresa May on industrial and economic policy.
Now, of course, over the last 18 months or so, we've seen energy prices that households face essentially more than double, and of course very big increases in the energy bills faced by businesses. This has been one of the drivers, not the only driver, one of the drivers of the huge peak in inflation that we've seen over the last year. And as we record this, we're about 10 days away from a Budget. We're looking to see what, if anything, the Chancellor will do to continue to address this issue in that Budget. So, lots to talk about.
So let's start with, start with you, Giles, you kind of joined us about a year ago to discuss energy prices at that time when they were rising rapidly, even before the Russian invasion of Ukraine. They've gone up. We hear quite a lot now that maybe they've stabilised, maybe they're going to be on their way down? What has happened in the market over the last year, where are prices now, what next?
Giles Wilkes
Well, I mean, from the point of view of a household, the first thing I'm going to do is that very sneaky thing politicians do, which is question the question, because from the point of view of a household, the market stopped being a market about a year ago, because everybody's price became the same, and when the government stepped in with its own Energy Price Guarantee, last autumn, which was part of the sort of cocktail of fiscal extravagance that Liz Truss launched upon us in the Autumn Statement, everybody, in a sense, suddenly got a price that was set by the Chancellor, which was then £2500 per typical household. It had been, in the years before, more like half of that, £1300 was more typical. So, from the point of view of the household, the market has become this thing that's being dominated by the government, and it was set to go up again to something like £3200.
And all of this was a lot lower than where it would have been if there was no intervention whatsoever. Had there been no Energy Price Guarantee at all last autumn, it would have been around £4200. So, the government, right now, is making the decision about where to put the Energy Price Guarantee, and it's likely to be, if you believe all the whispers coming out through the tabloid press, £2500 again. Because gas prices, which are the dominant factor in determining what the energy price bill is going to be, shot up all the way through the summer, then came down almost as hectically. They're now still much higher than they were before Vladimir Putin invaded Ukraine, but still much, much lower than last summer.
So - sorry, there's a really confusing picture there - but to come down to it, in the end for households, it's going to look like energy bills are roughly the same as where they were before all of this, but for the government, it's become much less expensive to guarantee them at that £2500 level.
Paul Johnson
And what, what has happened to the, so supposing the government weren't doing anything here, our energy bills at the moment would be where, and where would they be going over the next few months?
Giles Wilkes
I think if the government didn't do anything right at all, they would be somewhere around £3000/£3200 per typical household. They would have gone up to something like £4500, even £5000 in the last year, had the government not been intervening whatsoever. So the shadow price that we would have been suffering has shot up and come down all over again.
Paul Johnson
Why has it come down so much? I mean, is there lots more gas out there or has demand gone down so much that it's brought the price down?
Giles Wilkes
Well, I mean, the answer there is a combination of things, as you imply, affecting the gas price. Now we all know that our energy bills are not all about gas. Gas is about 40% of the electricity mix in a typical year. It’s come down a little bit in the last few years as offshore wind has come off, but gas is the thing that determines the price at the margin for electricity generators, and it's overwhelmingly the thing that matters for households heating their houses. So why has the gas price come down so much? Partly it's a matter of luck: we've had a very warm European winter, and it's the European gas price that matters a lot here. Gas is traded internationally, but the price is not the same in Asia as it is in Europe and as it is in the United States. We've also, because of the limits coming through Russia, and then the virtual stop that happened from mid-summer, there's been far more liquefied gas coming in through terminals, and that as well, it's gone up from something like 80 billion cubic metres to 130 billion cubic metres, so much more trading. There's been a great reduction in demand, not just because of that warm winter, but also because industrial demand has come down by something like 20%. And so, people have been finding alternatives to the gas that comes through the pipeline from Russia, and that has, with a little bit of luck, helped us to sort of limit things. And in fact, European gas storages, as a result, are much fuller than they would normally be at this point of the year where they're normally depleted, having been burnt all the way through a cold winter.
Paul Johnson
Wow, that sounds very positive. I'm trying to imagine what 130 billion cubic metres of gas might look like, but sounds like a lot.
Giles Wilkes
You would have to dip into a big North Sea cavern to have a good sense of that.
Paul Johnson
So we've got a lot in storage, we're getting more coming through liquefied natural gas into the terminals. Can we expect the price to sort of carry on on a downward trend now? Will we get back to pre-Ukraine levels anytime soon?
Giles Wilkes
My suspicion is that those levels are not going to be seen again for a very long time. I mean, part of what's confusing about gas prices is they're quoted in so many different ways. I think in terms of per kilowatt-hour, it was more normal to have something like €10 per kWh before the crisis. They went up to something like 300. They've come down a long way to like 30 to 50, but 30 to 50 is still two or three times as high as it used to be. I'd be very surprised if, given that the world's biggest gas exporter, it's certainly the biggest source of it for Europe, has virtually turned itself off - that's Russia - that we will ever see the similar pre-crisis levels again. But what might happen in the next decade is we just become less and less reliant on it as we find new alternative ways of heating our homes, like heat pumps, for example, and different ways of powering the grid like offshore wind and so on. So, if all of those things go well - and there's a really big if there, because there's a lot of investment to be paid for to make that possible - then we might ultimately find ourselves worrying less about the gas price. But I'd be very surprised if gas prices are ever, in the short term, or even the medium term, as low as they were before Vladimir Putin invaded Ukraine.
Paul Johnson
And finally, before I come to Heidi, one of the things I think people find quite confusing about this whole thing is that, as you say, gas accounts for less than half of our electricity production, and yet the price that we pay for our electricity seems to be set by the cost of gas. Can you just explain to listeners how that is and why we're in that position?
Giles Wilkes
Yeah. It's not easy to explain. The major reason is, though, that gas is the marginal producer: it's the last thing that is turned on when you need to put extra capacity onto the grid or take extra capacity off. A market normally works by, what are you going to have to pay for the very last marginal item of demand? So, everyone accepts that that is not a really satisfactory set of circumstances, because it means that if you're steadily producing, like through a nuclear power station or renewables, you gain a huge windfall when that marginal price goes up because of the marginal production of gas, and that's rewarding you for something that seems like you haven't needed to make any particular effort to produce. So, the government has started consulting on trying to find an alternative to marginal gas pricing, but it's very difficult to do because that's one of the natural ways that markets behave, that you normally price something by the last produced item, and the last produced item is normally gas because it's the most flexible thing that can be turned on and off according to when it's needed.
Paul Johnson
And that's why we've got windfall taxes for some of these energy producers?
Giles Wilkes
Yes, yes exactly. It's because it's seen as an unearned monopoly benefit if you like. Renewables, for example, would have been very happy to have received sort of £60 per MWh and they were getting hundreds and hundreds, and I think, well, you didn't need that to encourage you to make that investment in the first place.
Paul Johnson
Some absolute windfalls being earned there. So, Heidi, Giles has sort of taken us through a little bit about what's been happening to the market, and how gas prices would be set in the market if we were actually paying for them. But of course, government has done quite a lot. As Giles put it, part of the fiscal, the large fiscal package, should we say that we saw last autumn, potentially costing an awful lot of money, people were very worried as it looked like energy prices might be not just doubling but tripling or even quadrupling that households wouldn't be able to afford it, people wouldn't be able to heat, possibly wouldn't be able to eat. So just remind us, what has the government done over the last year or so? There's been quite a lot of different things, so just unpack that for us a bit.
Heidi Karjalainen
Yeah, sure. So basically, yes, the government has done a lot. Of course the most important part of this, as Giles already described, is the Energy Price Guarantee. So, that caps the prices of gas and electricity that energy companies can charge their customers to a level that implies, say, an average bill of £2500 per year for households. You know, this is a really large subsidy, so, we think that over this winter, this is going to save the average household about £900, so a really large subsidy - without it, energy bills would be around 70% higher than they are at the moment. So of course, that means that there's also a very high cost of this policy to the government. So again, we think over this winter, so, from October to the end of March, the cost is about £25 billion. In addition to this, the government also introduced this one-off discount on energy bills over this winter, so that's £400 for every household, which has been paid in monthly instalments over the winter, and that costs another roughly £12 billion, so really large subsidies. And I think one thing to highlight here is that these are policies that affect every single household, so, all households are getting this £400 discount, all households are facing the same capped prices of gas and electricity over this winter.
Paul Johnson
It's worth saying, those are staggering numbers, I mean, that's getting on for £40 billion in government spending just over this, was it a six-month period?
Heidi Karjalainen
Yes, yes.
Paul Johnson
Which is, over six months, an awful lot more than we spend on the entire defence budget, it's probably more than we spend on schools over that six-month period - I mean it's absolutely vast.
Heidi Karjalainen
Yes, no, it is. It is a huge amount of money, but I think what's also worth pointing out is that, even with all this government support, as we already discussed, gas and electricity bills this winter are about 80% higher than they were last winter. So even with all this support, with the £40 billion spending from the government, households are still really feeling a squeeze on their living standards because these energy bills are so much higher. So, you know, the government has done a lot, but I think a lot of households will still be feeling the squeeze and really feeling the effects of these prices.
Paul Johnson
And if you're on very lowest incomes, if you're on universal credit, means-tested benefits, you get more on top of that as well?
Heidi Karjalainen
Yeah. So, the government has some more targeted support through these cost-of-living payments to households that are receiving means-tested benefits. So, this year, for example, if you're on means-tested benefits, you get an extra £650, those on pension credit get an extra £300, and those with disability benefits get another £150, and those payments are going to continue into the next financial year.
Although there the point I would make is that actually a lot of those payments, what they're making up for is the fact that, you know, we operate benefits with a lagged measure of inflation, so in a way where benefits rise every April in line with inflation of six months before. So, because inflation rose so quickly between September 2021 and April 2022, the real value of benefits is still lagging below the value of those benefits before the pandemic. So, basically, the cost of living payments in some ways are making up for that lag and not so much the energy prices per se.
Paul Johnson
Yeah, it's a remarkable fact that with inflation high and rising, the real value of benefits lags behind for quite a long time. The thing that astonished me from the work that you published a week or two ago, Heidi, was that we don't expect the real level of benefits to get back to their pre-pandemic levels until 2025, because each year it doesn't quite catch up with what's been happening to prices.
Heidi Karjalainen
Yes, exactly. And especially when we have this period where inflation remains high for quite a long time, you know the catch-up is only going to take place once inflation starts falling and falls for quite a while. So that's why it is going to take a very long time still for those households to see the real value of their benefits to return to pre-pandemic levels.
Paul Johnson
And these £900 top-ups, actually on average the cost of that, I mean overall the cost of that is slightly more than if benefits had been fully uprated, but it's pretty random distribution among benefit recipients. If you weren't entitled to very much in the way of benefits, then this is worth an awful lot to you; but if you had a very high level of benefits - for example, you had you know, significant numbers of children, and you were almost entirely dependent on benefits - then this probably isn't enough to make up for the higher inflation.
Heidi Karjalainen
Exactly. And, you know, another sort of strange situation that this creates is these kind of cliff edges in terms of whether it makes sense for you to take on work, for example, if you're on universal credit. Because if you lose universal credit entitlement, you also lose these quite large flat-rate payments, so it creates these cliff edges, also, in these kind of incentives. So, so, yeah, there are many reasons why we would prefer a system where we just uprate benefits in line with current inflation, rather than having this lagged measure and then the flat-rate payments going on top of that.
Paul Johnson
From recollection, I think you found that there might be something like 800,000 - more than 800,000 - households where if their incomes went up a bit, they'd actually be worse off because the way that these benefits usually works, is your income goes up a bit, you lose a little bit of benefit, and you at least get a bit better off, but you lose this whole £900 if your incomes go up, and you reckon, and I think there were eight or nine hundred thousand households in that situation, where if their incomes went up a little bit, they could actually be worse off.
Heidi Karjalainen
Yeah, that's exactly right.
Paul Johnson
Which is an extraordinary situation to be in. What next? I mean, there's been an awful lot of speculation about whether this Energy Price Guarantee, which is supposed to go up from £2500 maximum, to £3000 maximum in April. I think the expectation now is that the Chancellor's not going to do that. I mean, Giles, you must have seen all of this in the press, I mean our presumption is that it's going to stick at £2500 in April.
Giles Wilkes
Yes, I mean it's such a visible bill. The problem that chancellors face with energy bills is, even if they think there are other better calls on their money, even if they feel that actually to address poverty there are better things to do, like address the universal credit system, do something else. It's, the energy bill is incredibly visible, and now it's associated with the government choice. So, if it's the case that bills shoot up by £700 for a few months, people will blame the government and be extremely angry about it in a way that all sorts of other impositions, such as like sneaky little fiscal drags, or little changes on the pension system, so-called stealth taxes which sound terrible, but my goodness, they're great for Chancellors. So, I agree with the speculation that the Chancellor, now that it looks like it's not a very expensive thing to do, will be very happy to leave it at £2500 and try to claim as much credit as possible for forestalling a counterfactual annoyance that people won't mostly be aware that they took, unless they were listening to this podcast.
Paul Johnson
You called them sneaky little fiscal drags, I mean, these are enormous fiscal drags at the moment. We're keeping the income tax allowance frozen for years, whilst inflation is very high, I mean this is netting the government tens of billions of pounds over this period.
Giles Wilkes
Yes, and it's also undoing, as I believe you've pointed out, it's undoing a lot of the rise in the income tax threshold well above inflation that the coalition government and then the subsequent conservative governments pushed for. I remember saying at the time, are you sure we can afford this?
Paul Johnson
I think we might have said this too.
Giles Wilkes
Yes, I'm sure you might have, and I think history will find that you were right to show those doubts. So, you might say that we're just undoing a big mistake, it was far too generous at a time of austerity to be saying to everybody, we'll take you out of tax. Well, turned out we needed your tax.
Paul Johnson
Indeed, indeed we do. A number of people have suggested to me that if people get used to energy bills of £2500 a year, and we're worried about climate change, is there an option here for the government to actually claw back some of what it's saved by actually artificially inflating energy bills going forward? Or do you think that's kind of so politically absurd, it's not even really worth contemplating?
Giles Wilkes
On the subject of politically absurd, one of the favourite things I've ever read from the IFS was an excellent piece of report you produced, I think in 2013 - now I’m looking meaningfully on the table here, there's the wonderful Green Budget from 2013 right in front of me, to remind me - was a piece of analysis about implicit carbon taxes throughout the system that found that the carbon tax on households was effectively negative because of the VAT subsidy. In other words, we have a far from rational energy price system when it comes to taxing households and trying to encourage them to incorporate that carbon externality in their decision making. So, in theory, a wholly rational government that didn't care about popularity would indeed be saying we should be raising prices because we need to encourage people to be more efficient, to burn less carbon implicitly through the electricity system, so, if those were the only considerations - in other words, if getting re-elected wasn't a point - then I think they ought to think about that.
I don't think it's very easy to do though, because new entrants will come into the energy system, it would need to be a very heavy and unavoidable fiscal imposition, otherwise the new people would come in and say, okay, we weren't there when all of these guarantees were being given and all the subsidy; we're going to come in and we're going to offer you a price without that extra imposition. So very hard to design practically, but yes, people in the Treasury must be producing advice, saying can we keep these bills high, people are now used to them, and they're encouraging people to do the right thing vis-à-vis the climate.
Paul Johnson
But of course, Heidi, one of the objections to that, and one of the problems created by the current situation is that energy is a much bigger fraction of the spending of people on lower incomes than it is for people on higher income. So, anything - it always looks like, it always is the case that carbon taxes or policies like that are regressive and indeed we've seen that very strongly over the last year.
Heidi Karjalainen
Yeah, absolutely. So, the poorest tenth of households spend about three times as much of their overall spending, or overall budget on gas and electricity, compared to the richest 10% of households. So that means that they have a much bigger exposure to changes in the prices of gas and electricity. Where we've seen that this year is that if we're calculating inflation rates for different income groups, the poorest households are facing much higher rates of inflation than the richest households, and that's because they're spending so much more of their spending on gas and electricity, and actually recently also food, where we've seen higher rates of inflation. So yes, that's sort of the the argument for where these kinds of policies that increase the prices of gas and electricity do hit at the poorest households harder. Of course, you can then come up with policies to sort of counteract some of that, but if you're only looking at the prices, then these kind of policies will lead to a higher rate of inflation for the poorest households.
Paul Johnson
So, in fact, to properly compensate the poorest households, you'd need to more than index their benefits in line with inflation, and what we've actually done, effectively, is to less than index them in line with inflation.
Moving to a slightly different topic, Giles, we've talked really almost entirely about households so far, but this is clearly something which also affects businesses. Now, you mentioned that across Europe a lot of businesses have managed to move away from gas, but we've also had some government help for businesses. What do we know about how this is hitting businesses and to what extent they've actually managed to adapt?
Giles Wilkes
Well, by all accounts, there are a lot more businesses highly exposed to this than is normally appreciated in government. When we were worried about this in 2013, when it was all about the environmental levies - and these sound very small when we talk about bills nowadays, they're like 50 to £100 per typical household, and that's really nothing compared to the price increases we've seen recently - but when you’re a steel producer, it's a really big deal, because if the steel producer just across the water is let off that bill, it makes a huge difference. So, we used to think about it just in terms of those really heavy industrial users of gas and electricity, like steel, like cement, like plastics and ceramics and so on. And there are particular schemes designed to mitigate that, and make it at least that they're still internationally competitive.
What happens when the bills get to this kind of level is every kind of business starts saying my energy bill is now a really significant factor, like hospitality in the winter (they need to keep those big rooms heated), like agriculture - I was listening over the weekend to people saying we can't produce tomatoes in this country in the winter like we often do because gas is one of the major cost items there. And so, what I think's going on right now in the government is they can't protect all of business, so business has been much more exposed to the actual energy bills that are prevailing on the open market than normal households are, and the government cannot draw a neat line around those businesses that need protecting and those that don't. So there's an awful lot of distress as far as I can tell. I don't know whether it's putting them under, but the real difficulty here is some of the same businesses that were hit extremely hard by COVID, the hospitality ones, the ones that probably ran through their reserves trying to keep viable during their long period of COVID lockdowns, are also being hit quite badly by this, so I wouldn't be surprised if there's some really serious distress in the hospitality sector, for example.
Paul Johnson
How much help are they getting?
Heidi Karjalainen
I think that over this winter, the help is basically they're benefiting from similar caps as households are. But what's going to change from April -
Paul Johnson
Yes.
Heidi Karjalainen
- is that instead of putting a cap on the prices that energy companies can charge businesses, the government is, over a certain threshold, the companies or businesses can get a discount on their prices of gas and electricity that they're paying. But what the current government is capping there, is the size of the discount, and that was designed so that we wouldn't have this situation where we don't have any certainty on the actual cost of the policy, because you know, if you cap a price, then the cost of the policy will be determined by whatever the difference is between the market price and the cap. So what the government did was they said, okay, we're going to cap the maximum discount per unit. So, that means that for the next financial year, the maximum cost of this policy would have been five and a half billion pounds, and actually, now it looks like it's going to be a lot less than that because the gas prices have come down so significantly.
Paul Johnson
Okay, so another thing we should be looking out for in the Budget is whether the support for businesses is going to be higher than currently planned?
Giles Wilkes
Yeah, and I suppose I mean, the implication of what Heidi said there is that it means that businesses are much more worried about the future course of gas prices, because they're going to be exposed to that. The government hasn't said however much it goes above this amount that's on the government’s balance sheet. It's going to be on the business balance sheet beyond a certain point, which is why they've got much more reason to be concerned if we have a cold winter or another hit to the international gas market in some form.
Paul Johnson
And I mean if we do get a very cold winter next year, I mean how much impact is that going to have on prices? I mean do you have any sense at all, is this something to be really worried about or, you know, given that that will be nearly two years after the invasion, given what you've said about our storage and access to LPG and so on, are we over the worst of this almost certainly?
Giles Wilkes
I'd be very surprised if just a year of getting prepared for this has been enough to shift us off the point where the entire loss of the Russian gas can mitigate any amount of demand that comes from a really harsh winter. This is a matter for speculation. I mean, the glib thing to say at this point is if I could predict that kind of future, then I'd be trading gas myself, but I remember being in Downing Street when this famous event called the Beast from the East happened at the end of March 2018, and gas prices shot up because the sudden influx of really, really cold weather into this country, and it came out of nowhere, just this sudden sort of finger of incredibly cold air hit the UK, and we were rescued by the fact that it was also quite windy, if I remember rightly. But still, gas prices absolutely shot up because it was really hard to increase the supply of it really short term. Now if something like that happened, or if it affects the European continent, or if it's a big tranquil period for the wind, you can't really predict how high the prices might go. But the storage that's in there will not be enough to cover absolutely all contingencies, so we can't rule out another price spike like the one we saw after the closure of Nord Stream 1, the big source from Russia, you can't rule out that kind of another price spike.
Paul Johnson
So where to from here? I mean, the Energy Price Guarantee: is this something that's with us for some time to come? I mean, if we look at next winter, are we still going to be sitting here with a £2500 or £3000 Energy Price Guarantee?
Heidi Karjalainen
Well, I think that will really depend on things like how cold next winter is and all these other things that affect gas prices, but at the moment, if we're looking at current projections, it looks like energy bills next winter will be at a level that's closer to sort of £2100 for a typical household per year. So that's actually quite similar to what we've seen this winter with the Energy Price Guarantee of £2500, and with the discount of £400 over the winter. What's really interesting is that the reason why we've had these level of prices this year, is that the government has spent £40 billion to keep prices or bills at those levels. Next winter, it's going to be actually sort of set by the market that we're going to have that level of prices.
I think, you know, so I think there are a couple of challenges that come from that - in particular, you know, households are going to continue to feel the squeeze of high energy bills because they're going to remain at a similar level, or potentially higher over the next year and beyond. But also, I think politically there's going to be a bit of a challenge when the government's spending a lot less on this policy than what they had predicted, people are going to see these headlines about falling gas prices and then they don't see any change in their gas and electricity bills. So, I think, you know, that that might lead to some political challenges in the coming winter. And I think that, you know, the conversations around this - you know, what is the right level of support, and so on - are going to continue into the next winter as well.
Paul Johnson
I guess that's one of, as you say, that's one of the big political economy challenges when you introduce an entirely new policy like this, you're protecting households across the country. Households next winter are going to be no better off than this winter in terms of their energy bills, they're going to be coming back asking for more. And as we run up to an election, you could imagine the opposition might be promising to do more, the pressure on the government to do more will be significant, but it's not going to want to get into a world in which the government permanently is guaranteeing lower energy prices. I mean, Giles, how's this going to play out in the longer run?
Giles Wilkes
In the longer run in particular there's another challenge which is, in order to become the kind of future energy grid we need for net zero, there needs to be a lot of investment and the normal way that you fund the investment is to put extra amounts on the consumer bill. For example, to fund new nuclear, there's an idea called the regulated asset base, which is meant to get consumers paying before the nuclear power station is being produced, and nuclear power stations cost 20 or £30 billion, so that means quite a significant chunk onto energy bills, not as much as what we've seen from the rising gas prices. But we also have the increase in investment needed in the grid. We're currently in a situation where when it's too windy, there's too much electricity going into the grid and people need to be paid to turn off, which is apparently, I read today in the Financial Times, almost £2 billion a year being spent turning off electricity when it's too much. Now all of these investments need to be made in order to have a future net-zero-worthy grid with lots more intermittent supply like wind and solar and things like nuclear, new nuclear plants, and that needs to be funded somehow and that's going to be part of the future consumer bill. So, normally the government would be facing that kind of decision, which at least is a kind of predictable, calculable amount, but a really difficult political economy question.
But when you throw in on top, as you say, people getting used to the idea that the variability in the wholesale price is something they shouldn't have to worry about, beyond a certain point, it's a really difficult decision. I think government ministers need to be starting to say to people, “we've protected you during the worst of this, when you weren't prepared, nobody was prepared, but you need to get used to the idea that gas is not going to be as cheap as it was before, and it's going to be something you need to be able to take on your own budgets” and we should look at the benefits system for the people who really, really can't afford it.
Paul Johnson
That's not an easy sell.
Giles Wilkes
Shaking my head very strongly here. I'm not good at politics.
Paul Johnson
Just the man who used to work in Number 10.
Giles Wilkes
We didn't win the elections.
Paul Johnson
But yes that, I mean, we should probably end on that note that we've got big spike in energy prices at the moment because of what's happening in the gas market, but we've got to spend a lot over the next decades to, partly to decarbonise the network, partly to provide us with security of supply, and at least in the short run, it's going to cost a lot of money, which, given the way that these policies have worked in the past, would normally end up on consumer energy bills. And if that's on top of a level which is significantly above what people have historically been used to paying, that's going to be difficult. But of course, if it doesn't come through from the energy bill, it'll have to come through taxation and that's also, in the end, comes from households.
So, as ever, difficult decisions to come on the Budget on March 15th. We expect the Chancellor to extend his £2500 Energy Price Guarantee, partly because it's now nice and cheap for him to do that, and will actually therefore be of less benefit to households. Households are going to have to get used to higher energy prices than they've had in the past, this squeeze on poorer households is going to remain, future costs coming down the road, and governments not going to be able to get out of this set of decisions terribly easily having, broadly speaking, left it to the regulator and the market over a period before this. So, this is something I suspect we'll come back to again and again in the work we do here at the IFS, and indeed on IFS Zooms In.
So, thank you for listening to this episode. To see more of our work, do visit www.ifs.org.uk. And to further support us, do please consider becoming a member for as little as £5 a month. You can find more in the episode description. See you next time.
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From price caps and pipelines to price guarantees and LPG, the rising cost of energy has been central to understanding the economy over the past year.
What is happening with the energy market? Should we expect further price shocks? And can we decarbonise our energy supply while keeping bills affordable?
Joining us are Heidi Karjalainen, Research Economist at IFS, and Giles Wilkes, a senior fellow at the Institute for Government and former special adviser to Theresa May on industrial and economic policy.
Zooming In: discussion questions
Every week, we share a set of questions designed for A Level economics students to discuss, written by teacher Will Haines.
1. Where are energy prices now and where will they go over the coming years?
2. How has the government supported households through the energy crisis?
3. Can the government continue to offer financial support to households with their energy bills or do we need to consider an alternative model?
Related content
Host
Director
Paul has been the Director of the IFS since 2011. He is also currently visiting professor in the Department of Economics at University College London.
Participants
Senior Research Economist
Heidi is a Senior Research Economist in the Retirement, Saving & Ageing sector. Her current research is on pensions and saving for retirement.
Senior Fellow Institute for Government
He has also been a writer of editorials for the Financial Times, Chief Economist at the think tank CentreForum, and spent 10 years in the financial markets.
Podcast details
- DOI
- 10.1920/pd.ifs.2023.0005
- Publisher
- Institute for Fiscal Studies
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