The price guarantee means reducing energy use is an urgent fiscal responsibility

After a long summer of promises of growth, low taxes and a ‘war on waste’, tomorrow’s mini-budget has been highly anticipated as this premiership’s first fiscal event. A big question remains to be answered: is this Government as interested in finding ways to save money as it is on spending it?

The £2,500 Energy Price Guarantee announced earlier this month offers some welcome support for households facing rising energy prices. That £2,500 average represents a near doubling of maximum energy costs since last year, but keeps them below the frightening levels (beyond £3,000, in some forecasts towards £5,000) that were being bandied about last month.

Yet that commitment comes with a hefty price tag – around £100 billion? – even before we get to support for businesses or public services. In theory, putting the Government on the hook for more of our energy spending might be a good thing, if it creates a powerful incentive for ministers to try and save money by improving energy usage and efficiency. Put simply, if the taxpayer must pay a share of the cost of every unit of energy the country uses, there is a very good case for the politicians we entrust with the public finances to do an awful lot more to help and encourage the country to use less energy. Yet, the noises coming from the Truss Government so far on this have not been especially positive.

In all, 19 million homes across the UK homes are rated as meriting an Energy Performance Certificate of D-rating or below. So the majority of homes fall short of the Government’s benchmark standard of EPC grade C – most homes in this country are wasting more energy than they should be. Given the level of energy costs, achieving this standard could save a household hundreds of pounds. The Energy Price Guarantee means the Exchequer would share in that benefit.

Poor insulation means a typical British home loses heat up to three times faster than our European neighbours. People living in the most inefficient homes lose £1 for every £3 that they spend. As gas-generated heat leaks through our drafty roofs, walls, floors and windows this winter and next, it will take with it billions of pounds in public money. In the months ahead, insulating homes will not just be good health, climate, and welfare policy, but also a matter of fiscal responsibility.

For a country where the national debt is around 100% of GDP and annual debt interest payments may soon exceed £100 billion, that fiscal responsibility is of growing importance. Failure to show such responsibility by at least trying to curb demand for taxpayer-funded energy would be reckless. Politically, that may expose Conservatives to accusations of not just profligacy but hypocrisy. It is, after all, not so very long since the party was running public campaigns arguing that Labour policies associated with lower levels of debt constituted an intolerable burden on future generations. In 2009, the Conservatives argued that “every child in Britain is born owing £17,000” on the basis of debt forecast to reach 60% of GDP. Applying the same (highly contestable) methodology and argument to the current fiscal outlook might suggest today’s infants owe something closer to £45,000 each – and that is before the costs of the energy relief package are taken into account. Does consistency not demand that a Conservative government take all available measures to minimise the debt burden on current and future generations by minimising the costs of its necessary energy policy via demand reduction?

To be fair, doing so would not be easy. This Government inherits a legacy of poor, fragmented energy-efficiency policy. David Cameron’s resolution to ‘cut the green crap’ in 2013 tanked insulation rates which have yet to recover. Had that self-inflicted wound been avoided, UK’s total housing stock would be using almost 10% less gas today, saving the Treasury around £9 billion in its first year of the price guarantee.

Yet, it is unlikely that these wrongs will begin to be put right in tomorrow’s mini-budget. Amidst a summer of leadership hustings during an ongoing crisis, there was limited recognition of the inefficient state of the UK’s housing stock and even fewer policy commitments to address the challenge.

At minimum, the Government should launch an information campaign, as civil servants have reportedly recommended but some ministers continue to resist. Such a campaign could include advice on how households can reduce their energy demand and increase energy efficiency, including quick-fix insulation mechanisms, boiler optimisation, and other tools. The lesson of the pandemic is that many people are keen to do the right thing and make sacrifices to help the more vulnerable members of society, if only they get the correct guidance.

The Prime Minister’s recent comments on such methods point away from this, claiming that “we are not talking about rationing energy[…] Ultimately, everyone makes their own decisions about how they decide to do things.” Recognition of individual discrepancies in energy use is important, but equally important is educating households on the tools available to them that decrease these costs. The PM’s instinct may well be to leave people alone to make their own choices, but where’s the harm in giving them more information on which to base those choices?

Besides, those sacrosanct individual choices aren’t purely private ones when they entail the use of public money. The simple fact of the Prime Minister’s energy policy is that it means each household’s choices on energy use and energy efficiency have direct consequences for the public finances. Laissez-faire libertarianism over the use of subsidised energy has a real and direct price for current and future taxpayers.

The Conservative Party’s 2019 manifesto promised to introduce new funding that would lower demand and increase efficiency. This included a £2.5 billion Home Upgrade Grant Scheme (HUGs) to improve the UK stock of homes. While the Government’s new policies will decrease short-term household costs, more costs could be saved for consumers and taxpayers by reducing UK energy demand in the long term.

In fact, certain policies under discussion have the potential to increase long-term household costs and decrease efficiency via the Prime Minister’s calls to “scrap green levies”. One of these levies – Energy Company Obligation (ECO) – provides crucial funding for energy-efficiency improvements for low-income households, saving them nearly £300 a year on their bills.

The success of ECO is rare against the backdrop of previously failed Green Deal and Green Home Grants policies, in part because of its funding. By being levied on bills by suppliers, rather than through the Exchequer, the scheme has avoided short-term political cycles and instead evolved through multiple iterations since 2013. While general taxation is a more progressive way of funding the scheme than on bills, this disruption poses risks to delaying critical efficiency improvements for low-income households this winter. The detail of mitigating these risks remains to be seen tomorrow.

Today’s energy and cost of living crisis is mitigated by the government’s energy price guarantee and that is welcome. Tomorrow’s costs – to households and taxpayers – could and should be shrunk further by reducing demand. Savings would be enjoyed by the government through decreased costs of future support schemes and health spending while boosting disposable income for households at a critical time.

The central decision to allocate significant sums of public money to lower energy bills is the right one. But it must be accompanied by an equally significant effort to minimise the overall cost of that decision by reducing demand for energy.