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How Will Liz Truss’s Cabinet Cope with the Energy Crisis? - Alperen Ahmet Koçsoy

While the United Kingdom mourns the death of Queen Elizabeth II and prepares for the kingship of Charles III, there remains a persisting concern about how the UK can prepare for the energy crisis challenge in the forthcoming winter. Liz Truss, who became the new prime minister of the UK on September 6th, is the person of focus regarding the response to the crisis.

A long and hard way awaits Liz Truss and her cabinet. Markets have already reflected on this challenge, making pound sink almost to the historically low levels since 1985. The energy crisis is one major challenge. The other associated challenge, inflation in the UK in the fourth quarter of 2022, is forecasted at 14% by BCC (British Chambers of Commerce). The forecast was made before Russia declared that it would halt flows from Nord Stream 1 natural gas pipeline until Western sanctions are lifted; thus, inflation may surge even more.

Liz Truss answered concerns over the energy hardship in the coming winter by announcing a 150 billion pounds energy support plan named The Energy Price Guarantee. The plan is much larger than the previously set £400 Energy Bills Support Scheme. It includes a price cap limiting average annual household electricity bills to £2,500 for the next two years. For businesses, the period of help will be six months. After six months, the help will be provided to ‘vulnerable industries.’ The difference between the actual price the energy suppliers would charge before and the capped price will be paid to energy suppliers with a £150bn help package. The prime minister also put out a £40bn liquidity facility to energy suppliers to help them cope with the emergencies and prevent them from running out of cash. Moreover, green levies, which are taxes on carbon-sourced electricity, will be ruled out temporarily.

However, there are concerns about financing the price cap. The decision to finance the energy suppliers for their losses from the price cap leads to fiscal loosening. If fiscal loosening exacerbates inflation, the monetary policy should be contractionary to handle inflation. In reaction to the new energy package, the Bank of England stated that it is likely to hike interest rates to bring down inflation. Although consumer inflation will be lower in the short run with the new package, it will rise later because of the new decision. This is the reason why the Bank of England is signaling interest rate raises. On the other hand, two of the suggestions to help finance Truss’s new package are (1) unlinking the energy prices from natural gas prices and (2) windfall taxes.

In addition, the government looks forward to increasing the domestic supply, from the North Sea oil and gas to nuclear and renewables such as solar and wind. Nuclear energy’s capacity is planned to progress up to 24 GW in 2050. Truss stated that she wants more oil and gas extracted from the North Sea. She told the Commons: “We will end the moratorium on extracting our huge reserves of shale, which could get gas flowing as soon as six months, where there is local support for it.” Fracking to extract natural gas and oil has long been criticized by environmentalist circles, and shale gas exploration has been under a moratorium since 2019, when Boris Johnson was the prime minister. Boris Johnson already expressed his dubiousness about Truss’s confidence in fracking. She should be ready to get more criticism from Green Tories.

In her cabinet, there are names that can conflict over clean energy. Alok Sharma and Rees-Mogg are the most prominent two of them. Whereas Alok Sharma continued his role of COP26 Presidency in the new cabinet, Jacob Rees-Mogg was selected as the new Business and Energy Secretary. Sharma, who stated back in July that he may quit if the new prime minister does not make a firm commitment to the net zero goal, will be working under Rees-Mogg. Rees-Mogg is known as a climate skeptic. He accuses “climate alarmism” of high energy prices. Naturally, he is pro-fracking and said, “We need to be thinking about extracting every last cubic inch of gas from the North Sea.” The appointment of Rees-Mogg looks intentional, aligning with Truss’s plans for fossil fuels.

For some, incentivizing energy efficiency should come together with the measures of increasing domestic supply and freezing prices. As its peers in continental Europe are trying to prevent energy waste, The United Kingdom should do the same to cut unnecessary demand to help finance the price cap on electricity bills. The government draws additional criticism, especially from Labour Party, for not imposing a windfall tax on energy companies. “I believe it’s the wrong thing putting companies off investing in the UK just as we need to be growing the economy,” the Prime Minister said. The UK “cannot tax its way to growth,” according to her. Since her leadership of the Conservative Party campaign, Ms. Truss has been signaling her neoliberal ambitions.

The United Kingdom and Liz Truss’s cabinet have a long winter ahead. With geopolitical uncertainties looming around, global economic hardships continuing and energy crisis persisting, not much is foreseeable. The government should implement pragmatic but also long-term policies. The opportunities in the North Sea might seem lucrative against Putin’s sanction on natural gas. However, it should also be remembered that (1) renewable energy sources such as wind power can be lucrative too, and (2) the United Kingdom should pursue its commitments to net zero. A sweet balance between short-run urgencies and long-run commitments; and between fossil fuels and clean energy is much needed at this moment.

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