The big six energy providers don’t need a bailout – they don’t deserve one either | Sandy Hager and Joseph Baines | Top stories
The big six energy providers don’t need a bailout – they don’t deserve one either | Sandy Hager and Joseph Baines
| Local News | Fox News
AAs the energy crisis worsens, the UK government is frantically looking for ways to provide relief to households facing steep rises in their gas and electricity bills. In the latest development, Downing Street would consider paying energy suppliers when wholesale energy prices are high in the hope that they do not pass on rising costs to consumers. When wholesale prices fall below a certain threshold, energy companies hand over money to the government. In effect, it amounts to an emergency bailout that guarantees the income of private energy companies when wholesale prices rise.
Energy companies, perhaps unsurprisingly, support the plan and financial journalists have described it as a “radical intervention”. But subsidizing energy companies is not radical in any meaningful sense. In fact, the proposed initiative is firmly aligned with the status quo, in which private companies reap massive profits in good times and see their losses absorbed by the state in bad times.
Although details of the government’s latest plan are scarce, there are already plenty of reasons to be skeptical about its effectiveness in tackling the energy crisis. The first is that it is much too late to save many of the small businesses in the sector. Over the past year, around half of energy suppliers in the UK, almost 30 in total, have already gone bankrupt. The majority of these bankrupt companies have been swallowed up by one of the five companies that own the “big six” energy suppliers.
One of the main impacts of the crisis has therefore been to further consolidate the power of the Big Six in an already highly concentrated energy sector. And at present, there is little reason to believe that the dominant players need government support. The financial impact of the energy crisis on suppliers will only be confirmed in the coming months, once they start publishing their financial reports for the fourth quarter of 2021. But early indications show that some of the The biggest companies in the sector fared very well during the onset of the energy crisis. For example, in its latest financial statements, SSE plc recorded truly enticing operating profit margins (operating profit to revenue) of 55% from April to September 2021, a period in which increases in wholesale prices were already shaking the energy markets.
The Big Six do not need to be subsidized by a price stabilization mechanism, nor do they deserve it. A recent briefing from the Common Wealth think tank explains this in great detail. The returns the Big Six provide to shareholders through dividends and share buybacks far exceed their returns to public finances through tax payments. Since 2010, the Big Six have spent more than £40billion on shareholder payouts, almost double the amount they paid in income tax. And the major shareholders of the big six, it should be noted, include mostly foreign governments, as well as asset management firms and investment banks that primarily serve asset-rich households, not low-income ones. income hardest hit by the energy crisis.
Rather than offering subsidies to the big six, the UK government should instead focus on taxing them and using the money to tackle the cost of living crisis. Well-designed, a one-off tax targeting major North Sea energy suppliers and gas producers offers an effective and fair way to limit the most regressive effects of the energy crisis. Unlike this temporary price stabilization mechanism, the energy giants are fiercely opposed to the windfall tax. But it is a policy which enjoys wide support and which has historical precedent, the latest one-off tax introduced by the Conservative government to raise £2bn in 2011.
At the same time, a windfall tax must be combined with a more ambitious strategy to bring energy suppliers back into public ownership. Since privatization of Britain’s energy system began in the late 1980s and early 1990s, the government has been forced to constantly intervene to deal with a seemingly endless parade of market failures. Instead of simply stepping in to support a dysfunctional and unstable market, the government now needs to quickly demarket the energy system to bring it much-needed stability. Without a public energy system protected from the whims and pressures of the market, it is difficult to see how the UK government can ensure clean and affordable energy for all.
Sandy Hager is Senior Lecturer in International Political Economy at City, University of London. This article was written with Joseph Baines, Lecturer in International Political Economy at King’s College London.
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