You can sense the sudden political alarm in Westminster. What, if anything, can be done to cushion the blow of higher energy bills that will hit consumers next April?
It seemed until recently that ministers’ plan A was to pray that wholesale gas prices in Europe would fall after their surge in the early autumn, thereby limiting the increase in average annual household domestic energy bills to £250 or so. There is not even a remote chance of such a gentle outcome now. Gas prices have been setting new highs this week, coupled with mentions of the word “unprecedented”. The current wholesale price of 400p-ish a therm compares to 60p-ish at the start of the year.
Five months of the latest six-month “observation window” for calculating the level of the next price cap have passed, meaning everybody can make a reasonable estimate of what the backward-looking formula will spit out in February. Energy consultancy Cornwall Insight says £1,865 per annum, versus £1,277 currently. Analysts at bank Investec think the figure will be closer to £2,000. Call it an average annual increase of about 50%, if the price-cap formula is applied mechanically.
And, critically, future gas prices suggest no relief in sight. Russian and German wrangling over the Nord Stream 2 pipeline, French nuclear shutdowns and higher demand for gas as backup to renewables are not factors that will disappear overnight. Stop thinking about a price “spike”, cautions Investec, and consider “a high likelihood of both prolonged and even higher gas prices through winter with an impact that stretches out over the next two years”. Cornwall’s early estimate of the next-but-one adjustment to the price cap in October 2022 produces a figure of £2,240 per annum.
Thus the belated scramble in government to explore a few fiddles to bills. Annual charges covering renewables incentives, one of the minor components, could be deferred. So, too, network charges, a bigger element. A similar smoothing process could be applied to the looming £2.5bn cost of absorbing the failure of 26 energy suppliers since August.
Add it all up, though, and Investec reckons such “mitigations” only amount to £300. Sky-high gas prices dominate everything. And it would be bold to try to use all the deferral fudges in one go; the policy equivalent of maxing out on the credit card. Only waiving VAT, payable at 5% by households, looks straightforward.
Current Westminster thinking seems to be edging towards bigger interventions to shield low-income households from the full blast. The winter warm homes discount scheme could be turned into an all-year affair. But again, unless the cost can be buried in general taxation and borrowing, it would mean other bill-payers picking up the difference and paying even more for their energy. That, in turn, raises deep questions of fair redistribution and who would qualify for a discount. There is no precedent to fall back upon.
The numbers at stake are colossal. If nothing changes, the additional annual energy bill for households will come to £18bn – or 1.3% of total consumer spending – on Investec’s numbers, and an overnight switch to average bills of £2,000 would add 1.8 percentage points to headline inflation in April 2022. Covid aside, there will be few bigger running political headaches in early 2022.
Doing nothing – in other words, letting the price increases rip under the standard formula – does not look politically feasible. But that’s as far as the thinking seems to have progressed. Ministers have about a month, that’s all, to find a strategy.
Landsec reaffirms faith in prime retail estate
The plan is to “reimagine retail”, says property giant Landsec, about half a decade into its confrontation with the growth of online shopping. It’s certainly having to reimagine what its shopping centres (thankfully not the largest part of its portfolio) are worth.
In a doubling-down transaction, Landsec is buying a 25% stake in the Bluewater shopping centre in Kent for £172m, adding to the one-third holding it already has. The interesting bit is how Bluewater has fallen in value over the years: the decline is about two-thirds since 2014, when Landsec first bought in. That’s an enormous movement for a shopping centre that, even now, is almost the definition of prime retail estate.
Landsec is punting, in effect, that the bottom has been reached. The thesis is reasonable since there is early evidence that rents in retail “destinations” are finally starting to stabilise. You have to wonder, though, what the group was thinking in 2014. Its acquisition timing back then was horrible.
