An energy bill rebate could easily backfire, says IEA economist

From: Think Tanks
Published: Thu Feb 03 2022

Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs, commented on reports that Boris Johnson is considering an energy bill rebate to help consumers with rising costs

The Times is reporting that officials are finalising plans for a new system of temporary rebates on energy bills, financed by government loans to suppliers. This proposal is better than some alternatives, but still deserves only a lukewarm response.

This plan is a form of price stabilisation mechanism'. The government would lend money to energy suppliers when wholesale prices are above a certain level, allowing companies to cut bills. However, when prices fall below this level, suppliers would be expected to pay these loans back, rather than pass any savings on to customers.

This should be a better deal for the taxpayer than simply giving money to suppliers to lower bills. It is also right that consumers ultimately pay the going rate for the energy that they use, to give market forces and price signals a better chance of working properly.

But there are four dangers in going down this route.

First, the scheme would mean that customers pay less when wholesale prices are high, but more than they would otherwise have done in future when prices fall. This smoothing of bills over time will still be helpful, but is it important that people understand that any savings now will be offset later.

Second, it would still be better (and potentially less expensive) to target more support at those that really need it. The savings being suggested (perhaps 200 per household) would still leave many poorer families struggling with their bills.

This scheme would therefore need to be part of a bigger package that includes extra help for low-income households, such as a further top-up to the Warm Homes Discount (though this seems likely to be part of the final announcement too).

Third, the taxpayer will bear the risks of fluctuations in wholesale energy prices, and the risks of loans not being repaid. This might be justified in an emergency. But in general, businesses should be expected to manage and hedge their own exposure to changes in their costs, and it is not the government's job to do this for them.

Fourth, the proposed scheme is described as temporary' and self-funding', but it cannot really be both. The scheme would need to be in place for an uncertain but probably long time if taxpayers are ever going to get their money back.

During this period, the government would effectively be setting prices, which should not be its job either. It is essential that the government uses this time for a fundamental rethink of its energy policies, many of which have actually contributed to the crisis. The proposed price stabilisation mechanism is another heavy state intervention that could easily backfire.

Notes editors

Contact: Annabel Denham, Director of Communications, 07540 770 774

IEA spokespeople are available for interview and further comment.

Company: Think Tanks

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