What will the new Truss-Kwarteng administration do about energy? And how might Labour respond?

Marc Stears has told the pundits they need to wotk out what Prime Minister Truss is going to do about the energy crisis.

I don’t think I count as a pundit, despite being better at punditry than most of the pundits, but FWIW here’s what I think Day 1 of the new Truss administration may bring as ‘response’ to the energy crisis. These predictions are based on what appears to have been trailed to date, most notably by her likely chancellor, Kwasi Kwarteng.

Labour will need both to respond to the measures and general direction announced, and set out its own alternative proposals beyond the immediate halt on price cap changes. If it does not, Truss is likely to get a much larger bounce than most pundits are currently predicting, because what she announces will sound radical and, at first hearing, deliverable, and will be set out in such as a way that when her plans do falter, she will be in a position to shift the blame.

I’ll be coming back later this week on what Labour’s overall alternative should look like, and here just set out what I think Truss will announce on day 1, and how Labour should respond to (and preempt) that announcement.

Truss’s short-term response

Truss and her team are not stupid, and they know they will not get a hearing for their national energy security narrative (see below) unless they are seen to address short term need, especially of those they can define as the most vulnerable. Truss is hamstrung by earlier announcements that ‘handouts’ are not the right answer, but less so on holding down the price cap, because this can be packaged as blaming Ofgem for not doing its job properly (unfair, but easy).

What I expect to see, then, is an order to Ofgem to hold down the price cap and, broadly, to get its act together, along with ‘targeted’ support for those most in need [1]. This has probably been trailed via the leaked idea of GPs ‘prescribing’ support on energy costs which, while rubbished widely at the weekend, opens the door to a support package (means-tested or based on council tax band) to be administered by local authorities, possibly with GPs also able to make referrals to local authorities as an add-on.

To outflank Labour further, it is likely that there will also be a package of one of grants for small businesses, especially high street retail and hospitality, on the same lines as Covid grants. All this will be sold on the ‘councils know their citizens best’ narrative.

Almost certainly, the sum allocated to local authorities will be woefully inadequate to meet the actual and unprecedented need of households ans businesses, and the temptation will be for Labour simply to suggest a higher sum, but in so doing it will just be hoist by its own petard; while Truss will just claim costs will be met by growth, Labour would need to follow its own precedent of costing its proposals, and voters will get lost in the detail.

Instead, Labour should demand a more radical solution. As I set out here in detail, it should demand — with a number of Labour local authorities using the legal mechanism available to it as backup — that the legal requirement imposed on local authorities under the Local Government Finance Act 1988 to set a ‘balanced budget’ should be revoked for as long as the time it takes for inflation to return to below 3%, say, with deficits legally held on council balance sheets pending their removal by (the narrative should go) an incoming Labour government.

This, Labour, should argue, would allow for proper support, run by organizations that proved their worth during Covid, and be an actual expression of ‘levelling up’. It should also be tied to local government innovations (again, already covered in detail here) such as the buying up of loan books as a way of protecting those in the most need. Taken together, these measures could constitute a ‘fiscal event’, where debt does not show up on the national accounts because it is technically held by local authorities, and in a way which might outflank Truss, who is using the term (presumably) simply to mean more borrowing.

Alongside this, Labour should set out measures that go beyond addressing additional costs paid by those on pre-payment meters, and say — in line with the July 2022 recommendation of the House of Commons Business, Energy and Industrial Strategy Committee (para. 202)— that anyone who wants to should be able to move from prepayment to payment in arrears.

Of course, one key reason [2] for not people not wanting to move away from prepayment is fear of losing credit rating in the event of non-payment of bills, so Labour will also need to demand that consumer credit rating must exclude energy bills from their rating mechanism (there is a precedent here in the form of the Iceland-Fair by Design scheme for interest free food, under which default on loans is explicitly outside the reach of consumer credit rating, and this will strike a chord with people).

Truss’s longer term direction

With a short term package announced, Truss will be in a position to set out her longer term narrative. As noted, Kwarteng has already trailed this in the press, and it will be about creating an explicit link between energy prices and energy security. This is not something Labour has done properly yet, and may well outflank it unless it has an alternative.

At the centre of this narrative is the North Sea, and the simple idea that the energy resources there belong to the UK. Of course this is perverse, given current legal ownership and how that came about, but it will not be too hard to sell the idea that regaining control of our own domestic reserves and using them to drive down the marginal price at wholesale auction will bring down the retail price.

It awaits to be seen whether Truss on Day 1 sets out an actual plan for regaining such state control, or whether it will remain a matter of “the government will bring forward plans”, but the existence of the Civil Contingencies Act 2004 to make it happen will not have gone unnoticed by her team — not least because its use was mooted in Autumn 2019 as a way to ‘get Brexit done’.

Section 22 of the Act is quite specific in giving powers to ministers, should they consider that a state of emergency exists and for the purpose of “protecting or restoring a supply of money, food, water, energy or fuel” to then

require a person or body to act in performance of a function (whether the function is conferred by the regulations or otherwise and whether or not the regulations also make provision for remuneration or compensation).

Handily, the same Section also makes clear that ministers can apply these powers “an area of the territorial sea”. Taken together these powers would appear to give Truss the power needed simply to order a North Sea gas producer to provide energy to the wholesale market at a price and in a volume which brings the retail price down, perhaps in cojunction with tapping the existing (or newly bolstered) capacity markets) [3]

Of course any such uniliateral action is likely to be seen by other states as yet another act of UK aggression, and potentially breach of law (at the very least of the Energy Charter Treaty) but Truss may see this as a plus, given that it will allow her to burnish her Thatcher MkII credentials. Moreover, she will be able, if Labour talks about the rule of law, be able to note that the Civil Contingencies Act is New Labour legislation, and that it is Labour itself that have been calling the energy siutation an emergency.

Labout therefore, even if Truss does not go this far, will need to respond quickly. One way to do this is to set out how the Civil Contingencies Act is, by its very nature, designed for short term actions, after which a prior states of affairs resumes; its use, Labour can claim, is merely about the short term, and does nothing to alter the energy ownership structure, or energy source mix, which are the root causes of the crisis. It is, Labour might claim,, just another version of a windfall tax of the type that Kwarteng has already said is a disincentive to innovation and investment.

But tfor a complete response, either to the use of the Civil Contingenicies Act or to any lesser but still unilateral measure, Labour needs now to set out its own plans for deep resstructuring of the energy system so that this can of crisis of distorted wholesale market cannot happen again.

Such plan will be, as noted, the subject of a subsequent piece, published in the coming days (here or elsewhere).

Note

[1] FWIW, I do not currently think that the plan proposed by Scottish Power currently being trailed, which amounts to long term security for energy retailers at a cost of £100bn will be adopted in the end. Such a ‘fisca; event’ seems just too wasteful, when simple borrowing could have the same effect much more cheaply, and leaves in place too obviously the current structure.

[2] There is also the question of landlords choosing to impose prepayment meters on multi-occupancy housing. This will probably require legislation to make it illegal unless all tenants consent etc.

[3] Alex Harrowell has, since I drafted this, kindly pointed out to me that a more likely piece of legislation to use would be Section 2 of the Energy Act 1976.