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Truss’ energy plan might be the least bad option

British Prime Minister Liz Truss’ energy subsidies could cost the country £200bn or more, depending on the price of energy. Details are scarce, but the aim of the proposal is to limit the average cost of energy for households, give consumers and businesses subsidies to cushion their cost increases and cap energy prices. energy, all for the next two years. Some EU countries are following broadly similar paths.

I am skeptical of such plans; all things considered, it would be better to let energy prices rise further. Nevertheless, I recognize that good solutions are difficult to find.

Basic economics suggests that as a good or service becomes scarcer, its price should be allowed to rise. Not only does this encourage conservation, but higher prices also provide more incentive for suppliers to increase production.

With energy, however, there are (at least) two problems. The first is that supply is often tightly regulated and can take a long time to build up. Many countries restrict nuclear energy, for example, or ban hydraulic fracturing. Truss has announced plans to deregulate hydraulic fracturing, but it will take years for the supply to continue. So there was no real market. For this reason, supply incentives – in the form of higher prices – will not work in the short term to solve the energy problem.

The second problem concerns demand, more specifically that of customers who cannot pay their bills: their supply cannot simply be cut off. If the Waterstone bookshop in London raises its prices and you don’t buy there, that’s fine. You don’t get the book, and they don’t get your money.

Utility bills don’t work the same way. Energy in one form or another is sent to your home and then you are asked to pay for it. If you don’t, there’s the painful question of if and when the service should be cut.

You may think, as I do, that public services should take a relatively tough stance on offenders. Yet the realities of politics can intervene. According to one estimate, Truss’ plan would result in average energy bills of £2,500, compared to £3,548 without the plan.

That’s quite a difference, and many people might struggle to pay the higher amount. They might be able to pay more, but at what cost? Fewer pub visits? No satellite TV? Would people actually choose such austerity? Customers know that if enough of them fail to pay their bills, it would be very difficult to cut off service to such a large portion of the electorate, especially as winter approaches.

For comparison, consider the current water crisis in Jackson, Mississippi. The city’s water service is underfunded, and nearly a third of customers are behind on their bills. About a sixth of customers don’t even receive bills. Still, it would be politically impractical for Jackson’s elected officials to cut off all those users, even if it would ultimately be more humane.

The fact is that it is not always possible to raise prices. Especially if you fail to collect any payment from many customers.

The problem is even worse. Once customers get into the habit of not paying their utility bills, it becomes more difficult to collect payment, even if future prices are much lower. Customers could expect the necessary non-payment regime to continue and plan with that goal in mind. This is a common problem in less developed countries.

All of this raises the question of how the Truss regime could improve British energy policy. A simple change would be to limit the fuel subsidy to low-income groups, rather than making it universal. This would save money and also make it easier to eliminate non-payers, who would not be poor.

As for the deregulation of energy supply, the Truss plan is well on the way.

Then there is the question of whether the fiscal liability for energy subsidies should be so unlimited. What exactly is the UK government doing to cover its financial situation? And would it be possible to have more details on all these programs? It’s not easy to design something so complex so quickly.

In the meantime, if everything seems inefficient, it probably is. But it is also very difficult to do better.

More from Bloomberg Opinion:

• UK’s cryptic £40bn bailout for energy traders: Javier Blas

• The reworking of the Truss fracturing will not be seismic: Thérèse Raphaël

• Get ready for Britain’s big sellout: Chris Hughes

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the Marginal Revolution blog. He is co-author of “Talent: How to Identify the Energizers, Creatives and Winners in the World”.

More stories like this are available at bloomberg.com/opinion