In the Bleak Midwinter: How (and How Not) to Tackle the Energy Crisis

The Adam Smith Institute’s latest paper, written by John Macdonald, Emily Fielder and Alex Hughes, sets out the most effective policies to tackle the energy crisis and alleviate pressure on poorer households.

• Since the Adam Smith Institute published its paper on the cost of living crisis in March 2022, the problems facing households and businesses have been exacerbated by rising inflation and energy bills;

• Whilst the support that the Government has already committed is welcome— as are promises to reverse the National Insurance hike—it is clear that more needs to be done;

• Any support the Government provides should be properly targeted towards those who need it most, whilst avoiding the risks of energy rationing and excessive debt;

• With this in mind, the Government should not freeze energy bills. While the scale of intervention is justifiable, the policy itself will destroy price signals, subsidising energy consumption without incentivising reduced demand. With energy supply under immense pressure, this could lead to energy rationing;

• In order to ease the burden of the cost of living crisis on businesses and households, the Government should consider:

  • Continuing to use direct cash transfers to households to help them manage the cost of living in a manner best suited to individual circumstances. This could be done through targeted £350 payments every quarter from now through 2023, alongside a lump-sum energy relief payment on 2021 energy usage;

  • Offering businesses Government-backed loans (based on 2021 energy usage) to help them spread the cost of energy bills. Interest would be set at 1.75% for the first year, rising to 1.75% + CPI inflation afterwards;

  • Uprating benefits in line with inflation immediately, providing relief to lower income households;

  • Bolstering energy supply by doing deals to secure emergency electricity from Norway, and opening discussions with the Dutch to reopen Groningen gas field.