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The energy crisis

All Areas > Legal & Finance > Money Matters

Author: Roger Downes, Posted: Wednesday, 26th January 2022, 09:00

Being Prime Minister is not a job I’ve ever fancied. The current incumbent was elected on a wave of national isolationism following the Brexit vote. He’s faced a number of challenges, some of his own making, but much of which he couldn’t have foreseen, mostly connected with the pandemic. But will 2022 bring an even bigger challenge in the shape of the energy crisis?

Natural gas prices rose to unprecedented levels last year, as a result of which a number of energy suppliers went out of business. Fortunately, there were others on hand to ensure a continuity of supply. That flow of company failures has slowed recently, but it has all the hallmarks of being the calm before the storm.

Global forces were in play in the creation of the crisis. The conspiracy theorists who blame China for the outbreak of the Covid-19 virus would cry foul in the same direction again. In being the first economy hit by the pandemic, China was also the first to recover. Its bounce back was strong and rapid, as a result of which it bought up significant amounts of gas supplies, reducing what was available for other economies. Add in the involvement of Russia in being the main exporter of gas supplies to Europe and, all of a sudden, the UK government is dealing with some international heavyweights.

It could cost as much as £20 billion

The PM and his advisors will be busy talking to energy bosses, trying to agree an agenda that is going to be acceptable for supply companies, but not allow prices to rise to unaffordable levels. Estimates predict the cost of government support could be as much as £20 billion.

What can the government do? Their options, as often they do, involve taxation. There are already political clamourings for the government to remove the application of VAT to energy supplies. It’s a relatively simple measure to implement and would benefit everyone on a pro-rata basis to their spending levels. However, with VAT on energy at only 5% currently, the fears are that it’s not going to be of any significant benefit to individuals.

They could head in the opposite direction and charge a windfall tax on the energy companies. Again, it’s easily introduced and would sit well with the government’s green agenda. It would be popular amongst most of the population too. But it would be equally unpopular within the industry and the PM would face a significant backlash. Heads he loses, tails he doesn’t win!

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