Instead of subsidising companies, the government should be taxing them to pay for the cost of living crisis
Last modified on Wed 19 Jan 2022 08.14 EST
As the energy crisis deepens, the UK government is frantically searching for ways to provide relief to households facing sharp increases in gas and electricity bills. In the latest development, Downing Street is said to be considering paying energy supply companies when wholesale energy prices are high in the hope that they do not pass on rising costs to consumers. When wholesale prices fall below a certain threshold, the energy companies would give money back to the government. In effect, this amounts to an emergency bailout that guarantees the income of private energy companies when wholesale prices rise.
The energy companies, perhaps unsurprisingly, support the plan and financial journalists have described it as a “radical intervention”. But subsidising energy companies is not radical in any meaningful sense of the term. In fact, the proposed initiative is firmly aligned with the status quo, in which private companies reap massive profits through the good times, and have their losses absorbed by the state through the bad.
Though the details of the latest government plan are scant, there are already plenty of reasons to be sceptical about its effectiveness in tackling the energy crisis. The first is that it comes far too late to save many of the smaller companies in the sector. Over the past year roughly half of the energy suppliers in the UK, nearly 30 in total, have already gone bust. The majority of these failed companies were swallowed up by one of the five firms that own the “big six” energy suppliers.
One of the main impacts of the crisis has therefore been to further consolidate the power of the big six in an already heavily concentrated energy sector. And at present there is little reason to believe that the dominant players are in need of government support. The financial impact of the energy crisis on suppliers will only be confirmed in the months ahead once they begin to release their financial reports for the fourth quarter of 2021. But early indications are that some of the largest companies in the sector fared very well during the initial onset of the energy crisis. For example, in its latest financial statement, SSE plc enjoyed truly eye-watering operating profit margins (operating profits-to-revenues) of 55% from April to September 2021, a period during which wholesale price hikes were already rattling energy markets.
The big six don’t need to be subsidised through a price stabilisation mechanism, nor do they deserve it. A recent briefing from Common Wealth thinktank lays this out in considerable detail. The returns that the big six offer to shareholders through dividends and stock buybacks far outstrip their returns to the public finances through tax payments. Since 2010, the big six have spent more than £40bn on shareholder payouts, nearly double the amount they paid in income taxes. And the major shareholders of the big six, it should be noted, principally comprise foreign governments, as well as asset management firms and investment banks that mainly service the asset-rich, not the lower-income households most strained by the energy crisis.
Rather than offering subsidies to the big six, the UK government should instead focus on taxing them and using the money to address the cost of living crisis. If properly designed, a windfall tax targeting the large energy suppliers and the large North Sea gas producers offers an effective and just way of curbing the most regressive effects of the energy crisis. Unlike this temporary price stabilisation mechanism, the energy giants are dead set against the windfall tax. But it is a policy that enjoys widespread support and has historical precedent, the last windfall tax being implemented by the Tory government to raise £2bn in 2011.
At the same time, a windfall tax needs to be coupled with a more ambitious strategy of bringing the energy suppliers back into public ownership. Since privatisation of the UK energy system began in the late 1980s and early 1990s, the government has been forced to constantly intervene to address a seemingly endless parade of market failures. Instead of merely intervening to prop up a dysfunctional and unstable market, the government now needs to rapidly de-marketise the energy system to bring it some much-needed stability. Without a publicly owned energy system safeguarded from the whims and pressures of the market, it is difficult to see how the UK government can secure clean and affordable energy for all.
Sandy Hager is a senior lecturer in International Political Economy at City, University of London. This piece was written with Joseph Baines, a senior lecturer in International Political Economy at King’s College London
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