Seven things you were afraid to ask about state responses to soaring energy bills

Confused about how the Government — and the EU — might help you with your energy bills this winter? You’re not alone, given the lack of clarity that’s been forthcoming so far. Here are the key questions:

What can be done about the energy bills you receive?

So far the Government is not promising to cut energy bills in any significant way — or cap them at any particular level. Some policy promises — such as cutting use at peak hours — might help a bit. And lower VAT and excise rates introduced earlier this year are likely to be extended. But the Government’s main focus, so far, is to compensate people through cash supports — not hold down the bills they receive. That said, the Coalition party leaders have asked civil servants to draw up a paper assessing the idea of capping bills. Does this suggest a rethink, or is this a tactic to have a study which would be used to criticise the Sinn Féin plan to cap bills? Or perhaps the Government itself isn’t sure yet what the best approach is? This needs clarity, quickly.

What are the pros and cons of capping bills?

The big plus of a cap is that it gives households certainty, at least for a period of time. Sinn Féin is promising to cap bills for the winter at 2021 levels at a cost, it says, of around €1.6 billion. This is part of a wider €3.8 billion package of supports it will outline on Friday. Capping prices requires paying a lot of cash to energy companies, who would otherwise go bust supplying power at below cost. The key problem with a cap is the lack of predictability on wholesale gas prices — if these shoot up again, then the amount which would need to be paid to energy suppliers could go significantly higher.

For now wholesale prices have moderated a bit and some forecasters feel they may ease a bit further, while remaining well above pre-crisis levels. But we just don’t know. This is the aspect of the cap plan which the Government is attacking, with Taoiseach Micheál Martin suggesting it had echoes of the uncertain exposure created by the bank guarantee. This is a bit of an overstatement — but a temporary cap does raise one big question. What happens when the cap runs out, if — as may well be the case — wholesale energy prices are still way above pre-crisis levels?

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What about the Government’s plan?

For now, this involves a range of once-off payments to households via energy credits and special once-off welfare and child benefit payments. Some permanent tax and welfare changes will also be announced, as always happens on budget day. However the bulk of the emergency support to households will come via once-off measures which are likely to cost well over €2 billion. So the exchequer cost of this is predictable, which is good, but for households there is still the exposure of not knowing what their energy bill will be and possibly facing further rises over the winter. This is where the political battle on this one will be. It also faces the same problem as a cap: what happens next year when the emergency payments run out if wholesale energy prices remain high?

Who would gain from the Government’s proposals?

This will be complex. All households would gain from an energy cap. This has the disadvantage of not pushing people to save energy, which is now a priority, too. Sinn Féin is also promising cash supports, with more going to less well-off households: up to €500 for those earning up to €21,000. The cash support element of the Government plan will also have a specific focus on less well-off households but more cash may actually go towards the general supports like the electricity credits. As of now it looks likely that Sinn Féin would spend more cash, though we will have to await the full details of both plans. The big exchequer surplus gives options this year, but we come back again to the question raised above. Will supports or caps introduced now inevitably become semi-permanent, or at least last a couple of years? And what would that mean for the public finances?

What about the EU plan?

Some of it looks a bit messy. Plans to save energy at peak times make sense and could help bring down prices a bit, though will come down to national governments. Building energy stores over summer has also helped.

The idea of a special charge to skim off excess profits earned by those producing energy from non-gas sources, like wind power and nuclear, is interesting in theory, but it remains to be seen whether a workable way to do it can be found quickly and without compromising energy supply over the winter. The idea that this could yield “billions” for Ireland, as some ministers have been hinting, has been hit on the head, it seems. This would only have happened if there was some kind of centralised EU collection of this charge and it was then distributed to member states via some allocation mechanism. It was always much more likely that this would be left to member governments to manage and the potential base for this charge in Ireland would not be likely to yield massive amounts of cash.

A separate Department of Finance study on a windfall tax on energy companies — a different concept to the charge the EU is planning, though targeting similar excess profits — estimated potential revenues in the hundreds of millions. That would be useful, but not game changing. Companies making big profits in Ireland would include the owners of the Corrib gas field — a Canadian company Vermilion and pension investors — and those profiting from wind generation.

Part of the challenge is to identify where any charge, or tax, should be levied. For example there is clearly excess profit being made from wind generation, but who is benefiting depends on contracts between producers and suppliers — and some big integrated companies claim they are using this financial cushion to avoid passing on higher gas prices to customers. If an EU-wide charge does emerge it would cap the price paid for electricity from sources other than gas and take the excess revenue which would be used to redistribute to households. Exactly what this would amount to in the Irish market in terms of revenue to the Government remains unclear. It also remains to be seen whether there is an EU deal here and on what terms.

Taoiseach Micheál Martin has said that the outcome of the EU talks remain uncertain. Will the Government revert to a more traditional idea of a windfall tax for the budget if the EU can’t make progress? A lot is still in play here.

But if there are big profits why are some energy suppliers leaving the market?

Smaller companies who buy electricity and gas on the market and sell it to consumers are exposed. This is because they do not produce energy themselves and will struggle to pass on the full cost of what they buy on wholesale markets to consumers. They may also face liquidity pressures because of the need to put down more cash to secure future supplies. Panda Power became the fourth small company to leave this week. Some of the bigger energy companies are closely monitoring their liquidity position, due again to this issue of needing to put down more cash to secure future supplies, and also concerns about households and businesses not being to pay their bills. This is one to watch over the winter and Government officials will be trying to judge the exposure of the sector here. The excess profits in the energy market are made by companies benefiting from cheap power production in sectors like wind and of course those extracting oil and particularly gas.

What about reforming the energy market?

At the moment electricity prices are determined largely by gas prices, as gas is the key swing supplier to a system where the price is set on the basis of the supplier of the final bit of power. This worked fine for years, but is now outdated. The European Commission is planning to bring forward reform plans here, but warns they will take time. Some halfway house plan could yet emerge in the short term, depending on how things pan out. The commission will not want to damage investment in renewable generation in any reform plan. But this is now a reform waiting to happen which could help consumers in the medium term.