Policy and background briefing for MediaLabour & energy –January 2022

The problem The global rise in wholesale energy prices has already led to27energy suppliers going bust in 2021. Customers have seen some increase in their bills, but have largely been insulated from the full extent due to the Energy Price Cap, which went up by 12% (£140) in October 2021.In February, Ofgem will announce the new price cap for April 2022 onwards. According to energy sector specialist Cornwall Insights, bills could rise by 46%, from £1,277 a year under the current price cap to £1,865a year.National Energy Actionpredictsthat the cost of heating the average home will have doubled since last winter. It is likely that by April 2022 an additional 1.5 million households willhave been pushed into fuel poverty, on top of the 4 million already struggling to pay fuel bills. Fuel poverty disproportionately affects poorer households, and the two regions with the highest rates are the West Midlands and Yorkshire & the Humber.Rising energy bills are partially due to a short term increase in the global gas price, but the reality is that a decade of Conservative Government has left us uniquely exposed to the market.In the last ten years, the Conservatives have failed to properly regulate our energy market, leading to dozens of energy companies going bust, with taxpayers footing the bill.They made the choice to slash the amount of gas storage, and leave us reliant on gas imports from places like Russia and Qatar.They have failed to meet the vast potential of British renewablesby blocking offshore wind, scrapping subsidies for solar, and in the last decade our nuclear programme has stalled. They have also failed on making more homes warm and well-insulated, from scrapping the last Labour Government’s zero carbon homes plan, to the botched Green Homes Grant.Our ProposalTo address the immediate crisis, Labour would bring in fully-funded measures now to reduce the expected price rise in April -saving most households around£200 or more, but targeted extra support to squeezed middle, pensioners and the lowest earners, receiving up to £600 off bills and preventing all of the increase in energy bills currently expected.1.Removing VAT on domestic energy bills for a year from April 2022: We would remove VAT on domestic energy bills for 12 months from April 2022. There are 28.5m households in the United Kingdom connected to the electricity grid (Source:FT). The saving they would each receive depends on their own domestic energy consumption and the price of domestic energy.It is expected that the energy price cap will increase from its current level of £1,277 to £1,865 for a typical user from April (Source:Cornwall Insight). Paying no VAT on a domestic energy bill of £1,865 means a household would save £89. Across all 28.5m households that implies a cost of £2.5bn.2.Expanding and increasing the Warm Homes Discount: currently only 2.2m households get the £140 Warm Homes Discount on their energy bills, despite 4.3m

households being eligible to receive the payment, including low-income pensioners and working-age households with young children or disabilities.The Government has already budgeted to spend £0.5bn next financial year on the Warm Homes Discount,according to a document published in 2021. We would increase that budget to £4bn, an additional £3.5bn, sufficient to provide a £400 Warm Home Discount to the 9.3m households who would be eligible to receive it (around a third of all households in Great Britain), as well as covering the extra administration costs (estimated at £19 per household). This budget would also cover Barnett consequentials for Northern Ireland.Households who would be newly eligible include all working families with children that are Claiming Universal Credit -currently only those working with income below £16,190 AND a disabled child or a child aged under 5 get it, so many families with children on low to middle incomes will be newly eligible. In addition,our plan would extend eligibility to the 220,000 pensioners in the savings credit group of pension credit and not on guarantee credit, those on a low income but who have some savings from before they retired.3.Smoothing the costs of supplier failure:Citizens Advice estimate that supplier failures since August 2021 will cost £2.6bn, or £94 per customer (Source:Citizens Advice). These costs will form part of the policy costs charged to bill payers and will be factored into the new energy pricecap figure, scheduled to be announced on the 7th February.Ofgem are consulting on a mechanism to smooth the impact of current extraordinary SoLR lvy payments.To prevent these costs going onto bills in April,we would lend money to suppliers, reducing the level of the price cap by £94 for a typical customer. We would urgently begin work with the regulator and energy suppliers to set a schedule for how in future years these loans would be repaid and over what timescale, at no overall cost to the exchequer.4.Contingency Fund: in addition to the above measures,we would allocate £600m to a contingency fund that could be used to support energy intensive businesses or for other purposes related to the energy price rise.What would our plan mean for a typical household?Someone on the energy price cap with typical usage is currently paying £1,277 a year for their dual fuel energy bill.This is expected torise to £1,865 a year from April, according to the latest estimates.Our plan would limit this increase in bills by eliminating the VAT costs of domestic energy and by removing the costs of supplier failure from bills. This would reduce the bill increase by £183.If the household is one of the low to middle income group that would be newly eligible for the Warm Home Discount under our plan, they would see a further £400 reduction in the rise. These 7m households would face an increase in their energy bills from April of just £5 a year under our plans.If the typical bill rises more than forecast, or we see further supplier failures, the savings would be higher.How we are going to pay for itWindfall Tax on North Sea Oil and Gas:

Table 3.4 of the October 2021 Economic and Fiscal Outlooksays that UK oil and gas receipts will total £2.5bn in 2022/23. Paragraph 3.45 of the October 2021 Economic and Fiscal Outlook says that between the point at which the forecast closed and the point at which it was published, oil and gas prices rose such that a further £2.3bn in UK oil and gas receipts is expected in 2022/23. That means the OBR expected in October that a total of £4.8bn inoil and gas receipts is coming in 2022/23.Profits from North Sea Oil and Gas are currently taxed at 30% Corporation Taxplus a 10% corporation tax supplementary charge. Therefore increasing the rate of tax from 40% to 50%, for example, would raise tax revenue by £1.2bn. This is likely to be an underestimate given prices have risen further since the OBR made their assessment in October.VAT receipts:The UK government is receiving more than they expected in VAT receipts as a result of higher prices.From the House of Commons Library:•In October 2021, the OBR forecast VAT receipts of £131.9 billion. The OBR’s forecast was based on outturn data up to August 2021.•So far, during this financial year (April –October), £78 billion has been raised from VAT receipts (see: ONS.Public sector current receipts: Appendix D)•Over the past 10 years an average of 42.3% of VAT receipts have come in the November –March period, although 2019/20 and2020/21 are affected by the pandemic and changes the Government made to VAT in response to it.•If 42.3% of 2021/22 receipts do come during November –March,this would mean around £57 billion of receipts during the period. This would bring total VAT receipts in 2021/22 to around £135 billion.That is £3.1bn more than the £131.9bn forecast by the OBR in October 2021.North Sea Oil and Gas Receipts:The UK government is forecast to receive more than they expected in tax receipts from North Sea Oil and Gas production, which has a unique taxation regime: corporation tax on offshore oil and gas is currently 30%, with a supplementary charge of 10% on top. This means North Sea Oil and Gas pays a total rate of 40%, compared to 19% for onshore corporation tax.The latest official forecast from the OBRwas published in October. Commentary within the forecast notes that a two-thirds increase in gas prices since the forecast was finalisedmay add£2.3bn in receipts in 2022/23 (paragraph 3.45). This money has not yet been allocated.Total revenue raised: £6.6bnBackground: A decade of Tory failure on energyA decade of failure to properly regulate the energy market•The light-touch regulation of the energy retail market has directly led to the collapse of energy companies.

•This is thanks to the Conservative’s reforms allowing cowboy companies into the market with very little regulation for which all customers are now paying the price as they fail.•On the wholesale market, long-term collaborative contracts (between different elements of industry) were outlawed under the Energy Market Reform in 2013.•The government was adamant they wanted to encourage competition rather thancollaboration (contrary to other European countries, such as France/Germany) meaning companies’ ability to plan for long-term contracts and secure prices were significantly hampered.A decade of failure on gas storage, leaving us exposed to global price shocks, reliant on Russia and Qatar.•Under the Conservatives, our national domestic gas storage capability is around 2% of our annual demand, compared to a quarter or even a third in some other European countries.•They refused to listen to warnings when acrucial gas storage facility was closed in 2017, giving the closure the green light, and washing their hands of responsibility. In 2017, the gas storage facility, Rough, then 75% of our storage, was planned for closure and the government could have acted to keep it open but did nothing.•Our lack of gas storage was raised by the GMB union and by the chair of the BEIS select committee in 2019, Rachel Reeves. The minister said: “The UK’s gas system is secure and well-placed to respond effectively to unexpected changes in supply and demand…we have also stress tested our resilience over the next twenty years, and we are confident that we will retain our current high levels of security now and in the future.”A decade of failure on renewables and nuclear•Despite some progress on renewables, Tory Governments have blocked onshore wind, scrapped subsidies for solar energy and have overseen a slowing in the growth of renewable energy in recent years.•They have lost a decade on progressing nuclear energy –in 12 years the Tory government has only approved one nuclear power station, and Hinkley Point is due to open 9 years late.•The government publicly recognise the need to move away from gas but are incredibly reticent to commit to exactly how that will happen -they have big plans in theory, but have not provided tangible plans on how exactly it will happen.A decade of failure on energy efficiency•One of the best ways to protect families, cut bills and emissions is to reduce demand by insulating homes. The last Labour Government had a plan to ensure every new home built would be zero carbon, protecting families from gas price volatility.•UK households are particularly vulnerable to high energy costs due to badly insulated homes -they are among the worst in Europe -and emissions from buildings are higher now than they were in 2015.•Inevitably, bill costs increase exponentially the worse insulated the home is, often meaning the most vulnerable households are paying significantly higher bill costs due to the poor efficiency of their homes, as well as a significantly higher proportion of their income on energy bills.•If we had been investing at sufficient scale in diverse, secure, zero carbon energy supplies and making energy efficiency a much bigger priority, we would not be in such a precarious position.

•The Government instead cut £1bn from their green homes grant scheme before scrapping it altogether, and its heat and buildings strategy has been delayed for month after month.