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Britain is on the wrong track on energy rescue

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Liz Truss’ first statement to Parliament as Prime Minister was one for the books: an energy bailout likely worth 5% of gross domestic product.

Truss on Thursday froze UK retail electricity and gas bills for the next 24 months, so an average household would pay no more than £2,500 ($2,877) a year, instead of the £3,549 which regulators have set for the next three months and well below the £4,000-5,000 expected in 2023. On top of that, she has promised companies the “equivalent” protection for six months.

The task, however, involves more than containing the cost spiral. On all other points, Truss’ policy is insufficient. Does it focus on poor and working class families? Maintain a semblance of a market to curb demand? Identify the cost and a way to pay it? No, no and no. Instead of targeted support for the needy, Downing Street has announced a one-off policy that will benefit households below the poverty line as well as those on Wall Street-sized bonuses. Is it really necessary to subsidize those earning hundreds of thousands of pounds – or more? Instead of nodding to market forces, the government eliminated them. And it made the situation worse by making no attempt to encourage conservation – which is absolutely essential to avoid supply shortages that could lead to blackouts. In a 1,267-word speech, Truss did not once mention the words “demand”, “consumption” or “savings”. Lower energy bills could have been tied to usage, with more frugal families receiving bigger discounts. The result could have been financial relief with price signals still somewhat relevant. Finally, instead of budget clarity, Truss offered uncertainty. In what will likely be one of the largest peacetime budget interventions in history, we don’t know the cost (the Treasury will release an estimate later this month, she said) or the funding sources. We know where it won’t come from: Truss said there will be no windfall tax on energy companies. The implication is that the government will borrow the entire sum and leave the repayment to future generations. How much will it cost? Prior to the announcement, internal government estimates pegged the tab at £130bn, plus a further £40bn if business aid was included. The £170billion is roughly what the country spends on its public health system. There is a catch. This is a potentially very expensive, very risky bet. By freezing energy bills, the UK Treasury effectively took the largest ever short position in the wholesale gas and electricity markets, unhedged. In the jargon of the trade, it is naked shorts.

If wholesale prices increase because a cold winter stimulates demand or Russian President Vladimir Putin further reduces supply, the cost will also increase, with no cap in place. The UK Cabinet Office wrote in a policy note to ministers: “The cost depends on the forward price of gas and electricity […] If a fixed commitment were made, there would be uncapped liability and the overall cost of the program could increase further. Of course, if prices fall, the UK Treasury will spend less money. Downing Street could offset the massive cost to taxpayers in two ways. First, it could intervene in the wholesale market, as planned by the European Union, by capping the profits of producers of renewable energy and nuclear electricity, whose prices are linked to gas costs. Their windfall must be taxed, preferably via a wholesale price cap on their production. Second, it could have taxed the extreme profits made by fossil fuel companies. It could also close some loopholes exploited by the many commodity traders who avoid paying much of their fair share through the use of tax havens. The prime minister is right that consumers are facing exorbitant prices because Putin has weaponized energy since the invasion of Ukraine. But excluding a windfall tax is a mistake, if only because it could help Downing Street in its talks with the energy sector. In any negotiation, a stick is needed with the carrot. The UK government will now try to strike long-term fixed deals, called contracts for difference, with renewable and nuclear power producers to reduce the cost of political intervention. Without the threat of a windfall tax, the government has weakened its own position. And any deal could allow renewable and nuclear companies much higher prices for years to come, in exchange for a slight reduction now. It’s a short-term win for a lot of long-term pain. Truss promised to deliver results. Unfortunately, his first delivery had to be returned to sender.

More from Bloomberg Opinion:

• Commodity traders switch from windfall to bailout demand: Javier Blas

• Time is not on Putin’s side in Ukraine: Leonid Bershidsky

• Windfall taxes are pure economic populism: Andreas Kluth

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”

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