District Matters

Impact of war on energy prices

September 2022

Energy prices and supply still appear to be some of the main issues. The domestic price cap of £2,500 is very welcome, as is the commitment to do something about non-domestic bills.

Supply issues may be a bit more fraught; the decision by Putin to cease deliveries through the Nordstream 1 pipeline caused an immediate spike in gas prices, since reversed. The constraints on supply and the need to reduce consumption, especially in Germany is likely to cause a recession and it looks as though there will be a need for rationing this winter.

Although we may think that the UK is remote from the impact of the closure, it will have a knock-on impact. Anything that will interrupt supplies this winter, and there are many possibilities, could mean that we get power cuts.

In some ways this could be a blessing in disguise, because it would change the perception of security of supply from an abstract concept to something very real. This could force the UK to have a well thought through and realistic energy policy. Something we do not appear to have had for at least 30 years. Such a policy would recognise very clearly the variability in supply from renewables. There is a clear need for greater investment in nuclear and there will have to be acceptance that we are going to need a significant proportion of energy supply coming from fossil fuels for the next 15-20 years. This will not please many people, but the alternative may be regular power cuts.

The reasons why we have not had an effective energy policy for so long reflects some of the deep-seated issues the UK faces; an inability to think strategically, a reluctance to invest at the necessary scale, and an unwillingness to face down opposition and pressure groups when it needs doing.

The need for businesses to have some relief from high energy prices is important. High levels of inflation are causing real difficulties. The squeeze in people's disposable incomes is really being felt. High energy and increasingly, food prices mean that people will have to spend more on the basics, leaving them less to spend on ‘nice to have' purchases. Pensioners on fixed incomes will also be hard hit. Unsurprisingly this will affect retail, hospitality and tourism, so we could take a disproportionally hard hit locally.

The cost to the Government of providing the support for energy prices will, it is assumed, be met by borrowing. Unfortunately, interest rates are rising so borrowing will be more expensive. There appears to be the first signs that investors are losing confidence in the UK. An illustration of this is that the pound fell to $1.15 last week. (As an aside, when Queen Elizabeth ascended the throne in 1952, £1 was worth $2.80.) This pushes up inflation, which in turn means that the Bank of England may need to raise interest rates more aggressively. Inflation is already having a direct effect on the funds allocated for Levelling Up and the Shared Prosperity Fund. The amounts bid for will not enable completion of the projects. Allocation of more funds may be challenging, so projects will need to either be scaled back or cancelled.

Given the new Government's shift in focus to economic growth, extremely welcome and long overdue in my view, it may well be that the criteria for successful bids in future will change to focus on a clear link to generating economic growth.

The circumstances we face as a District Council will put an even greater premium on thinking strategically, taking difficult decisions and most definitely not ‘kicking the can down the road' and hoping something turns up. It will be a time for a clear-eyed realism about what we can and can't do for our residents.