UK energy’s looming bailout implies a quid pro quo

LONDON, Aug 22 (Reuters Breakingviews) - UK energy companies are pining for a state bailout. With average annual customer bills already 50% above their 2021 level, the likes of EDF (EDF.PA) and Centrica (CNA.L) want politicians to sign off on a support package that could theoretically exceed 100 billion pounds. It’s logical as soaring wholesale prices push bills even higher, but the deal implies a quid pro quo.

Energy suppliers and politicians are nearing consensus on a so-called “deficit tariff scheme”, according to people familiar with the matter. Under the plan, Britain’s 29 million households would have annual power bills capped at their current level of 1,971 pounds. Private banks or the government would then lend to a fund, which would front suppliers the difference between wholesale energy prices and what customers are paying. The power groups would then pay back into the fund as the crisis eases, by charging customers an increment on their bills for a decade or so.

The idea is simple, and necessary. But it will cost a bomb. Plugging the gap between gas prices and bills could require at least 2,000 pounds per household. If wholesale gas prices stay high for two years, as forward values suggest, then the cost would be 116 billion pounds. That’s nearly 5% of GDP, and in the same ballpark as the 133 billion pounds of cash support provided to banks in the global financial crisis.

Unsurprisingly, utility executives stress the difference between 2008 and 2022. They argue this is a bailout of customers rather than their business models, and that those customers will pay the money back. If private-sector UK banks like Barclays (BARC.L) lent to the fund, the scheme need not inflate Britain’s debt, already about 100% of GDP. Politicians could cut costs by ramping up windfall taxes on energy giants like BP (BP.L).

Still, a bank-funded scheme could cause a stink when consumers realise they’re paying back interest as well as energy costs. Governments could reduce the borrowing costs by guaranteeing banks against losses. But that may make it harder to avoid putting the debt on the state balance sheet.

Lenders that took state capital in 2008 had curbs on dividends and faced heat on executive pay. The government could in theory force utilities to fast-track zero-carbon targets and roll out heat-pump installation in return for taxpayer support. But it’s not hard to imagine punitive measures like bonus and shareholder-distribution bans too. Power groups may not warrant so much of the blame for the energy crisis, but some of the consequences of state help could be strikingly similar.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

Energy UK, Britain’s trade association representing power suppliers, said on Aug. 18 it had written to the Treasury advocating a “deficit tariff scheme” to help British consumers weather the energy crisis.

The body said that the next price cap, which comes into force at the start of October, was predicted to exceed 3,500 pounds, compared to the current 1,971 pounds. It called on the government to increase the amount that will be provided by the Energy Bills Support Scheme – up from the current 400 pound grant pledged in May.

The deficit tariff scheme idea reflects the fact that high prices are set to persist throughout 2023, with further big increases predicted for January and April. The plan would see government-backed loans used to keep bills down throughout 2023 by covering the increased cost of wholesale energy for suppliers, and allowing these costs to be spread over a much longer period of 10 to 15 years.

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