Jeremy Warner's Outlook: Public policy failure has a lot to answer for in Britain's growing energy crisis

Energy policy in Britain has been a mess for as long as anyone can remember, and shows few signs of getting better. With customers facing swingeing increases in fuel bills, the consequences of years of neglect – and of living high on the hog of cheap North Sea oil – are coming home to roost in the most uncomfortable of circumstances, further squeezing already stretched disposable incomes.

The shock of yesterday's price increases by British Gas, which may send overall CPI inflation surging to more than 5 per cent, is all the worse in that we have become used to relatively low energy costs in Britain. There is no point in blaming British Gas and its parent company, Centrica, for the scale of the price rises, or in knee-jerk calls for windfall profits taxes to penalise the supposedly evil energy companies.

Profits at British Gas collapsed 69 per cent in the first half, and the company was running at a loss by the end of the period. With wholesale gas prices for this winter at nearly double the level of a year ago, British Gas would be hundreds of millions of pounds in the red for the remainder of the year if it left prices unchanged. British Gas's own energy bill has gone up £2bn in a year, and if it wants to stay in business at all, let alone fund the massive programme of investment demanded by the Government in renewal and renewables, it has to pass these increased costs on.

It's always possible, but as far as I can see there is little evidence of gouging going on here, though it is certainly true that British Gas and others were slow to put their price down when wholesale costs were falling. The plethora of different tariffs and deals make it almost impossible to compare charges of one company with another, and therefore ascertain whether competition is working as it should in ensuring the lowest possible prices for consumers.

Yet even taking account of strongly rising profits being earned from Morecambe Bay and other gas production assets, Centrica's profits as a whole will be lower this year. In any case, the Government is already benefiting from the windfall tax it imposed on North Sea profits a couple of years back.

The effective marginal rate of tax on Morecambe Bay profits is, as a consequence, at 75 per cent, with the result that Centrica's overall rate of tax on profits will rise to nearly 60 per cent this year. Centrica will be paying some £200m more tax to the Exchequer despite the precipitous fall in the profits at its British Gas offshoot. This can hardly be seen as profiteering that ought to be countered with more taxation.

I don't want to get too much into the argument over whether the company is doing enough to counter "energy poverty", though there is no reason to disbelieve Centrica's claim that it is actually doing quite a lot more than others. Yet should it really be left to the corporate sector to be shamed into pursuing these social purposes? These surely should be matters for public policy, not corporate charity.

According to Department of Business and Enterprise figures, Britain has the lowest prices for gas within the EU, ignoring the eastern European accession nations which still have access to fixed-cost Russian sources of supply. We are also among the lowest for electricity.

Yet the best-placed country by far for the overall price of energy is France, which through the 1970s and 1980s invested heavily in nuclear and is now sitting pretty as it enjoys the fruits of abundant electricity produced at now relatively low fixed costs. By contrast, Britain squandered the blessing of North Sea oil and gas while the price was low and is now increasingly reliant on ever more highly priced imports.

Nor is the massive programme of investment in renewables demanded by the Government going to make the situation any better, at least in the medium term. In terms of upfront capital spending, wind is one of the most expensive power sources of the lot, and it is all going to be paid for through rising fuel bills.

Any windfall tax would be likely to result in higher prices still, while at the same time discouraging the foreign and indigenous investment that needs to be made in Britain's energy future. There's no telling what a government as much on the ropes as this one would do in the search for populist measures to improve its fortunes. But I can think of only one reasonable way of extracting more money from the industry so as to apply it to lower bills for the needy. This would be to increase the auctioning of emission permits from the present 7 per cent to the maximum of 10 per cent allowed under the present phase of the European emissions trading scheme.

The cost of carbon is already priced in to the wholesale markets, so there would be no justification in generators seeking to pass on whatever they had to pay for extra permits. Whether a Government as profoundly strapped for cash as this one would in practice recycle these extra revenues to the fuel poor, or just sink them into the general pot, is an interesting question.

Is Lloyds TSB's strength now its weakness?

Whether by design or necessity, Lloyds TSB has so far managed to avoid the worst pitfalls of the credit crunch. Eric Daniels, the chief executive, is a deeply cautious banker out of the old school, so he would no doubt claim it was sound judgement rather than good fortune that kept him from the bear traps.

While everyone else was off chasing the spoils of securitisation, he just stuck to his knitting, ploughing a lonely and apparently uninspired furrow in conventional retail and commercial banking. If everyone had done the same thing, perhaps we wouldn't be in the mess we are today.

Yet Mr Daniels' reticence was also because, having overpaid for Scottish Widows and ground costs in the core bank down to the bone, Lloyds TSB emerged into the new century a deeply constrained beast with nowhere to go except sideways. Even if it had wanted to, it couldn't have indulged to the same degree as others in the wild west-ern frontiers of investment banking and structured credit. So why have the shares performed almost as badly as everyone else's in the banking sector, and actually rather worse so far this year? Despite an increase in the dividend and the bank's insistence that it is uniquely well placed for a low-growth environment (well, everyone's got to be good at something, haven't they?), the shares took a further beating yesterday.

The most obvious explanation is the headline 70 per cent plunge in statutory profits. Yet looking beneath now familiar writedowns on structured credit, and the effect of adverse insurance volatility, the performance was reasonably good, with strong growth and apparently none of the funding difficulties which have beset other banks.

Unfortunately, the effect of this growth has been quite significantly to impair the core, tier one capital ratio to just 6.2 per cent. What's more, conventional bad debt experience is on the rise, both in mortgages and commercial banking. Again, the group attributes most of this rise to growth, rather than recorded defaults. Yet it readily admits that things are bound to get worse, and what really worries investors is that because of Mr Daniels' caution, Lloyds TSB is today an almost exclusively UK bank, making it highly vulnerable to a prolonged UK downturn.

The decision to increase the dividend suggests Lloyds is confident of weathering the storm. But we've already seen such sanguine thinking shatter-ed among other banks, which having only recently raised their dividends have since been forced to abandon them entirely and raise new capital.

All the same, for those who believe, as I do, that the downturn won't be quite as bad as the headlines suggest, Lloyds looks a reasonable bet. Analysts have been predicting a dividend cut at Lloyds TSB for as long as I can remember, yet somehow or other, the bank has always managed to keep the payouts coming.

The present yield at more than 11 per cent again suggests an unsustainable level of dividend going into the future. Either the stock market or the management have got it wrong. Which one it is should be apparent by the end of the year, but just remember those words, "well positioned for a low-growth environment". We'll find out soon enough.

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