In many countries, electricity tariffs are set based on the price of various fuel or energy sources, either on the international or national markets.
- In France, it is based on the cost of nuclear energy;
- In the UK, it is gas;
- In Germany – coal;
- And in some countries such as Canada – hydroelectric power.
And thus, the UK is considerably exposed to the present high price and cost volatility of gas on the international market. However, as more renewable energy has come on stream over the past few years, the rate at which gas has set the wholesale price of electricity has decreased by about a third. Therefore, the UK government is reluctant to facilitate ramping up oil production in the North Sea as policy makers work to decouple the UK electricity price from the international wholesale gas price. It is worth noting that the oil produced in the North Sea is sold on the international market and imported as part of the larger global oil stocks supplied to the country, so the additional oil production in the UK will not directly lower the cost of oil within the country.
As fuel prices steadily increase, there is mounting pressure from many circles pressing the government to use everything in its ‘toolkit’ to support customers, if not to reduce energy cost, to at least slow the acceleration of the expected cost increases. Additionally, green levies now account for almost 20% of the cost of electricity bills for companies. To relieve some sectors of these high costs, some electricity industry experts and environmental campaigners are urging the UK government to consider moving the environmental taxes from electricity tariffs to general taxation or a larger portion even to gas tariffs to relieve businesses that are really starting to feel the impacts of the inflationary high electricity costs.
For domestic households, two key measures that the government can undertake to relieve customers of the high cost of energy:
- Maintain the existing price cap beyond July 2026
- Reduce VAT and fuel duty on petrol prices
The UK Government will be providing targeted energy support to vulnerable customers due to the high volatile prices caused by the Iran War and other external shocks.
At the beginning when the Iran war first started, £53 million was earmarked to be provided to domestic customers that use heating oil, as this energy source is not covered by the energy cap. Now the energy support may be extended to vulnerable customers that use gas as their primary energy source for heating.
Two schemes that could be considered for the support include:
- Targeted and means tested based on need for struggling households
- Universal assistance for the everyone no matter financial status
Alongside carrying out these measures, there has been a clarion call from many corners for the UK government to issue new drilling licenses to exhaust all the North Sea oil and gas reserves. Opponents to this idea argue that by exploiting the remaining hydrocarbons in the depleted North Sea basin will do nothing or just little to reduce the cost of energy in the UK as the oil and gas supplies will be sold on the world market and imported back in the country based on international prices. And by using these reserves the UK will prolong their dependence on fossil fuels and protract the process to decouple electricity tariffs from the cost of gas.
There are quite a few levers that the UK government can pull in trying to relieve the high energy cost for households and businesses, especially those that are struggling. Whatever is chosen it should be well thought through and in line with recommendations laid out by the UK Climate Change Committee (CCC). It is worth noting that oil and gas will still make up part of the UK energy mix in 2050, albeit a small percentage, especially in those sectors, such as aviation, in which it is harder to abate emissions. However, the continued use of hydrocarbons needs to be coupled with the use of Carbon Capture Usage and Storage (CCUS) technology as recommended by the UK CCC.
So, if the UK government for some reason decides to go ahead and issue new drilling licences, exploration of new areas should be carried out only alongside CCUS technology. And the use of hydrocarbons should be reduced in line with the trajectory recommended by the UK CCC. To assist with the energy security, the additional revenue earned from the tax receipts should ONLY be used to develop more renewable and low carbon energy plants to aid in the acceleration of the energy transition. In other words, the additional tax revenue earned should not be added to general treasury fund to be used to fund other areas of government. Additionally, the UK should create the environment or support those industries that use CO2 as an input to create other products and thus creating carbon sinks for the carbon emissions and thus reducing the amount that need to be permanently stored. Therefore, in any policy decision made by the UK government to allow for the new drilling of hydrocarbons in the short term, should be done within strict ‘guard rails’ applying the mantra, ‘Polluter Shall Pay’ concept with the proceeds from tax receipts used to assist in funding the energy transition.