energy

UK energy crisis: Super-CFD would put government in a hole


Professional labourers are better employed deepening the hole they are in than ministers are. Amid consumer fury over rising energy costs, the UK government is considering paying energy groups to hold down bills. The scheme resembles the contracts for difference used for hedging in financial markets.

An energy price cap is already creating big state liabilities via the unintended consequence of supplier collapses. Similarly, the Super-CFD is more likely to provide ministerial hole diggers with a bigger spade than solve the UK’s energy crisis.

European gas prices have surged in the past year as inventories have dipped to decade lows. Already about 15m customers are on the capped tariff, according to watchdog Ofgem, covering more than 60 per cent of total, thinks Bernstein. The Super-CFD may be seen as a means of preventing more energy suppliers from failing like Bulb Energy did in November.

It would require the government, rather than suppliers, to cover customers costs above a ceiling wholesale price. A government which once begged customers to shop around for the best energy prices, would find that few did so any more.

Supposedly, suppliers would repay their subsidies by charging consumers above-market rates after energy prices fell. There are three massive snags with the scheme. First, repayments could become large liabilities cluttering the balance sheets of suppliers. Second, consumer groups would complain as vociferously about the clawback as they are complaining now about pricey electricity. Third, the subsidies would create moral hazard, leaving taxpayers on the hook when imprudent suppliers failed years down the track.

True, CFDs helped UK renewables groups get on their feet. Wind power costs — onshore and offshore — about halved in the decade to 2020 according to think-tank IRENA. Strike prices for CFDs came down as renewable energy costs themselves fell.

But that was a different case. The Super-CFD would be a dangerous exercise in kicking the can down the road. The best solution is for the government to help needy households through the benefits system and for everyone who is able to pay market prices.

The Lex team is interested in hearing more from readers. Please tell us what you think of the Super-CFD scheme in the comments section below.



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