How bad will the energy crisis get and what is being done?

Inflation is predicted to hit 18.6% in January, and energy bills are soaring

Rushhour on the M56 motorway
A bailout for energy bills now seem ‘inevitable’
(Image credit: Ashley Cooper)

With every passing week, the inflation shock facing the UK looks bigger and more frightening, said Chris Giles in the FT. The benchmark European gas price surged to its highest closing price on record on Monday, as Russia shut down a key pipeline, taking the rise during August alone to 45%.

That’s just for starters, said Emily Gosden in The Times. The cap is now slated to go to £4,600 in January, and more than £5,800 in April. A winter reckoning is coming, with the very real chance of shortages and blackouts.

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How will small business be affected?

The misery facing households is “only half the story”, said The Sunday Times. Small and medium-sized businesses (SMEs) are the “backbone of this country’s economy” – and that backbone is “creaking and threatening to break”. Businesses don’t benefit from a price cap, and pay 20% VAT on energy compared with 5% for households.

Thousands of SMEs have already closed or are “on the brink”. Nearly one in six say they expect to shut or downsize – a “more serious” shock even than the pandemic. Alas, this reckoning could “scar the economy for years to come” in a country that already seems to be “falling apart”. Just as the oil shocks of the 1970s “shifted the economic dial, ushering in prolonged high inflation and unemployment and a barren business environment, the risk is that we go down that rocky road again”.

What can be done?

Energy suppliers and politicians are nearing consensus on a “deficit tariff scheme”, said George Hay on Breakingviews. The plan would keep consumer bills at around their current level, and government-backed loans would “front suppliers the difference between wholesale energy prices and what customers are paying”. The deficit would then be closed by charging customers an increment on bills for a decade or more. “The idea is simple, and necessary. But it will cost a bomb” – some £116bn if gas prices stay high for two years, as forward prices suggest.

A Covid-style bailout for energy bills is “now inevitable”, said The Sun. It’s needed to help millions of Britons avoid “shivering hunger” this winter. But a wider bailout that subsidises all households and businesses would be damaging if it convinces the public that “our Government, after its Covid generosity, will borrow limitless amounts” to shield us “from any hardship inflicted by global events. That is not possible. It is the fast track to national insolvency.”