[00:00:00] Ravi Gurumurthy: I think now you can really argue that the pragmatic choice is electrification—that we should be going "hell for leather" for EVs and heat pumps because they're so much more efficient. And you know, they just stop us being exposed to these volatile price spikes that we're getting due to even more global instability that we've always had.

[00:00:19] Ravi Gurumurthy: So I think it does make electrification the pragmatic choice. It also makes homegrown renewables and nuclear a really sensible thing because we're again stopping ourselves being exposed. This is really because electric technologies are so much more efficient than the technologies they replace. If you think about EVs, they turn about 80% of electricity into motion, whereas a petrol car with an internal combustion engine turns about 20% of petrol into motion. So you know, EVs are four times as efficient. This is really helping to reduce our primary energy demand, not just shifting fuels but reducing how much energy we need. And similarly with heat pumps and gas boilers—you know, a heat pump that's kind of passably efficient, but not "knock it out of the park" efficient, can still be four times as efficient as a gas boiler.

[00:01:11] Joe Owen: Hello, welcome to Policy Fix by Nesta, the research and innovation foundation. I'm Joe Owen. Every episode we take a policy problem and chat to a couple of experts about how to fix it. If you like this episode, please do like, subscribe wherever you get your podcasts, and please do share with all the policy nerds in your life.

[00:01:31] Joe Owen: Before we start, can I say a massive thank you to everyone who listened to our first three episodes. We are so grateful, and particularly grateful for those of you who have subscribed. If you haven't done it already, please do it; it is a massive help to us and also means that you will get a notification every time a new episode lands. We have also really enjoyed all of the comments and feedback, so please do keep those coming.

[00:01:52] Joe Owen: So, yet again, Britons and Europeans face worry and anxiety about their energy bills. We've seen prices rise at the petrol pumps and there is concern of a "bow wave" of costs waiting to make its way through the system and possibly into our food prices, our energy prices in the winter, and also general inflation.

[00:02:13] Joe Owen: So joining us today to talk through what is happening to global energy supplies, what it means for British households, and what the options are facing the UK government, is Ravi Gurumurthy, Chief Executive here at Nesta, and Madeleine Gabriel, Director of Nesta's mission to electrify heat in the UK.

[00:02:32] Joe Owen: I want to start with what we know and what we don't know about the implications for what's going on in the Middle East for our energy supply. Ravi, how and why are we affected?

[00:02:38] Ravi Gurumurthy: Well, obviously affected because about 20% of global oil demand is being passed through the Strait of Hormuz, and that is not able to go through at the moment. I think what we don't know at the moment is how long it's going to last. We don't know how long after the conflict stops there'll be a "hangover." Is there going to be permanent destruction to facilities? What will happen to the way in which oil passes? Will it be taxed essentially through the Strait of Hormuz?

[00:03:09] Ravi Gurumurthy: I think the thing we do know is that this is having an effect—unlike the Ukraine crisis—on both petrol, jet fuel, as well as electricity and gas. So if you think about the Ukraine crisis, it was primarily a gas problem that affected electricity prices and gas prices, but petrol remained relatively okay. Whereas this, I think, is going to be seen more through petrol prices immediately and jet fuel, whereas electricity and gas—partly because of where this has come in the year—will be relatively okay during the summer months and we'll see the bigger effect in winter. And there will also be a lag; so even if things stop, there'll still be a kind of hangover next year.

[00:03:51] Joe Owen: And is there anything UK-specific about the effects? Are we more exposed than other countries on anything, or is it a sort of common impact?

[00:03:58] Ravi Gurumurthy: Well, I think it's a bit of a mixed picture in a way because we don't get very much of our gas and LNG from the Strait of Hormuz, so we're less directly affected physically. But obviously, we're affected indirectly because of the overall demand going up with Asia, in particular, needing more LNG. We're also very, very gas dependent still because we've not got coal on our system—that is a vulnerability. But on the other hand, we've done a huge amount of renewables in the last 20 years. The fact that we've got about 60% of our electricity being renewable helps.

[00:04:31] Joe Owen: Madeleine, Ravi touched on it there, but obviously in 2022 Russia invaded Ukraine and we saw a big spike in energy prices. Could you tell us a bit more about why that was or how that was different to what we're dealing with now?

[00:04:42] Madeleine Gabriel: So, as Ravi said, one of the key differences is that this crisis affects both gas and oil, whereas in 2022 it was primarily a gas price crisis. Another key difference is that the scale is different. So if we look at how gas wholesale prices have changed this time around, about two weeks after the start of the war in Iran, gas wholesale prices have jumped by 70%. But if you compare that to what happened in 2022, it's actually quite a lot less. So, at a sort of comparable time after Russia invaded Ukraine, gas wholesale prices had gone up by 250%.

[00:05:20] Madeleine Gabriel: And the absolute figures are different as well. So you know, at the moment, we've seen gas prices on the wholesale markets jump from 2.5p to about 4.3p, whereas back in 2022 they were already higher—we'd had some other supply shocks—so we saw them jump from something around 6.5p to a spike of about 17p. So you can see how different and how deep the crisis was last time compared with this time.

[00:05:42] Madeleine Gabriel: And we are looking at... you know, I suppose you could say, well, that's a good thing, it's not quite as bad. But of course, we are still looking at quite significant jumps to bills. The current, the most recent projections by Cornwall Insight about what will happen to bills in the summer this year is that our energy bills might go up by around £200. So that's, you know, going to have a real effect on households.

[00:06:11] Madeleine Gabriel: But then again, if you compare that with 2022, we saw energy bills going as high as—you know, they would have gone as high as £4,000 without government intervention. So okay, on the plus side, not quite as bad, but as I said, also affecting oil as well. And that's affecting prices for people filling up on petrol, on diesel. We've seen petrol prices jump about 25p, diesel prices jump about 49p, and heating oil as well prices have doubled. So per liter, heating oil prices have gone up from about 60p to 120p. So it's having an effect across the economy in a different way, but not quite as deep as it was before.

[00:06:47] Joe Owen: So a sort of real and genuine shock but not to the scale that we saw in 2022. Obviously in 2022, as you alluded to, the government did some really big interventions—tens of billions of pounds in terms of support for households. Ravi, obviously as Madeleine said, we're not at that sort of scale of shock yet, but what are the lessons from the kind of interventions that the government made in 2022 that we should be thinking about now, or the government should be thinking about now as it weighs up what to do looking at the winter?

[00:07:16] Ravi Gurumurthy: Yeah, I mean we're not at the scale that we were last time, but that's at this current moment. And I think it's partly assuming that this stops at some point, and also we'll be in a totally different situation in the middle of the winter when demand is much, much higher if this is still in place. I mean if you think back to the Ukraine crisis, what did we do? We basically cut bills for everybody; there was the Energy Price Guarantee. It was incredibly expensive—I think the OBR said we spent about 40-odd billion pounds in that one year. So it was an extraordinarily large intervention.

[00:07:52] Ravi Gurumurthy: The standard question I think you face is: Do you do targeted support or do you do general support? And you give it through cash transfers to people—winter fuel allowance type things—or do you actually try and cut the price itself? And I think it's not intuitive what the right answer is. So actually, there is a good case for cutting electricity prices or gas prices, partly because it can actually reduce inflation.

[00:08:20] Ravi Gurumurthy: So if you think why was the Treasury quite supportive last autumn of cutting electricity prices? It was because it helped to reduce inflation, which then has a big effect on things like benefit levels or public sector pay. Whereas if you just give people cash, it just fuels inflation. So there is a kind of "hard-headed" economic argument for saying do the sort of energy price cut as opposed to cash transfers.

[00:08:46] Ravi Gurumurthy: The problem, I think, is that again from first principles you'd probably want to make this more targeted, but we don't really have a very good mechanism for targeting subsidies at the right place. If you wanted to make this progressive in some way, actually probably use the tax system; you probably give subsidies and then claw it back through the tax system, which is actually progressive. Obviously, that's really hard politically, but in practice what we're doing now almost is increasing taxes after the crisis to claw back the kind of difficult fiscal position we've got ourselves into.

[00:09:16] Joe Owen: I definitely want to come back to the "what are the hard options for the government now." I think your point on scale is really interesting. People can wang around numbers that all sound big—40 billion pounds in a year—we spend about 60 billion pounds a year I think running England's school system as a sort of point of comparison.

[00:09:34] Joe Owen: Madeleine, we can sort of—and we'll get on to talking about the different ways the government could or should respond—but as Ravi said, we have to wait and see what happens and not understand quite yet what the trajectory might be. How do you think the government should decide when to respond and how should it calibrate scale? What are the signals that you're looking out for that would suggest it's time for intervention from the government in a big way?

[00:10:04] Madeleine Gabriel: I think there's a few things you could think about. One is about giving people confidence that the government is going to do something. And I think actually the early announcement on heating oil support was helpful in that sense. Rachel Reeves got up and said she was going to put aside 53 million pounds for heating oil support; she actually didn't say who it would go to, apart from that it would be targeted, but at least that gives people some confidence that as they're thinking about going into winter, that there will be some support available.

[00:10:28] Madeleine Gabriel: So one thing is about just what can we tell people that's going to assuage their concerns to some extent. I think another point is that there is a far stronger case in my view for supporting household energy bills than household fuel bills, because the effect on what we pay for our home energies is going to be larger than what we might pay for driving around. And while it's not true of everyone—some people really rely on their cars—most drivers will have some easier ways of reducing their spend on fuel than they will on energy.

[00:11:03] Madeleine Gabriel: I suppose in terms of scale, I mean last time the government effectively capped the average bill at £2,500. As I said earlier, we're now currently for July looking at bills that are about £200 higher than they are now—I think the most recent prediction suggests that the average bill from July could be £1,850 or so. So we're some way off £2,500, and bills have actually been at that level without people talking about support as recently as last spring. So it really does depend on what happens in the winter. And I think we'll get some sense of where prices are going from the summer when we start seeing energy companies buying forward contracts and Ofgem will start having a sense of what the winter prices are likely to be like.

[00:11:54] Ravi Gurumurthy: I think it's an interesting point about giving people confidence now about what they can and can't spend in the future. Because if you think about the last year, all the speculation about tax increases was a terrible backdrop for the economy, and now we're having the same situation where people are thinking "Oh my God, what's the next year going to look like?" So even on fuel duty, the government isn't really saying what it will do, even though we all assume they will do something if it persists. And I think almost saying "These are the kinds of packages we will offer under different circumstances" might be a way of just engendering a bit more confidence that you know, people don't need to maybe worry as much as they are doing.

[00:12:35] Joe Owen: Even the principles through which will guide their decisions—so again, if the government doesn't want to stop short of saying "These are the specific packages on the table," even just as you say, providing some information about when and how they will make decisions on intervening.

[00:12:53] Joe Owen: Okay, I want to get into the sort of hard options then for intervention from the government, and in particular, what are the big radical options that might reduce the UK's exposure to future risks? So we'll start with bills and supporting households. Ravi, you've touched on this a bit, but is the choice between expanding targeted transfers versus general support? What is on the table, and how should the government weigh the options?

[00:13:22] Ravi Gurumurthy: Yeah, so I think the typical choice is between expanding targeted payments—Cold Weather Payments, Winter Fuel Payments, benefits—versus saying we're going to do another Energy Price Guarantee. I think that will depend on the size of the shock. If it's enormous and they just need to help everybody, then I think they will be in exactly the same position as Ukraine. If they can get away with it, they prefer to do a more targeted package.

[00:13:52] Ravi Gurumurthy: I think the difficulty is that it's quite hard to get it to the right people. So you have people with large fuel bills, but maybe just above the threshold for certain benefits. So there are lots and lots of losers who will not be picked up by current targeting mechanisms because we don't really have good information on people's actual energy use and the ability to match those people to benefits.

[00:14:17] Ravi Gurumurthy: So I think because of that inability to target well, I'd be surprised if there isn't something more general. And as I said, then the choice is: Should you just give it through a cash payment—a check in the post—or should you do it through actually cutting the energy bill? Last time it was done very quickly and effectively, and as I said, it does reduce inflation in that way, which then feeds into decisions on public sector pay and benefits and pensions and so on. So that's why I think what might be a strange thing to do—which is suddenly subsidize bills—becomes quite rational if we're in that high-inflation period. But I think the first option will be to try to do something slightly more targeted if the spike is less big.

[00:15:06] Joe Owen: So there's quite a big tipping point from where you go from using existing mechanisms that exist to do something quite targeted, to being quite quickly onto big generalized subsidy.

[00:15:20] Madeleine Gabriel: I suppose a third option, or it's a bit like the big generalized subsidy, might be to go a bit further on some of the measures that Rachel Reeves announced in the budget last year where she took some of the costs off energy bills—specifically off electricity bills. So she removed 75% of the cost of the Renewables Obligation, which is the biggest green levy on bills, and took that into the Exchequer. There's still some of that left, though, and there's still some other levies, and that could be a change that would affect everyone's bills but also be a longer-term shift in the cost of electricity. From our perspective, that would help redress the balance between electricity and gas prices.

[00:16:00] Joe Owen: I'd like to come back to you on this actually, because my next question was going to be about kind of driving investment towards the government's electrification ambitions. And if it wanted to ensure that any of the sort of fiscal firepower and the money it puts on the table doesn't just go into bailing out households today but materially reduces the UK's exposure to future shocks, what should the government be doing if it wanted to really turbocharge electrification as part of this crisis? What do you think it should be considering and weighing up?

[00:16:28] Madeleine Gabriel: Just to start off with, I just wanted to point out how important a tool electrification is in reducing our reliance on fossil fuels. I mean, this is really because electric technologies are so much more efficient than the technologies they replace. If you think about EVs, they turn about 80% of electricity into motion, whereas a petrol car with an internal combustion engine turns about 20% of petrol into motion. So EVs are four times as efficient. This is really helping to reduce our primary energy demand, not just shifting fuels but reducing how much energy we need. And similarly with heat pumps and gas boilers—you know, a heat pump that's kind of passably efficient but not "knock it out the park" efficient can still be four times as efficient as a gas boiler. And that means that if we're switching from boilers to heat pumps, we are reducing our gas demand in total, even if we generate all the additional electricity with gas. So this is a really important tool that we can put at our disposal.

[00:17:29] Madeleine Gabriel: In terms of turbocharging electrification, I think reducing electricity prices relative to gas is probably the key lever. And one of the interesting things we might expect to see—or in fact we are already seeing with the price changes that have come through so far—is that the ratio between gas prices and electricity prices has already started to narrow. That will be because, you know, we're seeing a shock to gas prices. So we use gas directly when we burn it in our homes, we also use it to generate electricity, but in terms of our gas bill, the wholesale price forms a bigger part of the overall bill, whereas in electricity the wholesale price is a smaller part—there are other costs. So we're already seeing that that ratio narrowing a bit, and government could go further to narrow it.

[00:18:15] Madeleine Gabriel: And we're also seeing people getting interested in home electrification technologies. I think over the last few weeks there's been a rash of articles from energy suppliers and others saying how demand for heat pumps, solar panels, and batteries has gone up—and EVs. Some people are just thinking, "I don't want to be exposed to these things. What can I do?"

[00:18:36] Joe Owen: Yeah, if the government wanted to capitalize on that, Ravi, and really make the most of it, what do you think it could be considering?

[00:18:41] Ravi Gurumurthy: Well, I mean, this first point is it would be different, I think, if they reacted not just with a sort of subsidy for everybody, but a way that was trying to shift our whole energy use into a different footing. So as Madeleine said, energy efficiency is key. The key to efficiency is actually electrification—that's how you get three or four times more efficient. And then the key to electrification is cheaper electricity.

[00:19:04] Ravi Gurumurthy: On the sort of cheaper electricity side, as Madeleine said, you could—there's quite a lot of tax on the electricity bill that isn't on the gas bill. So the Renewables Obligation that Madeleine talked about, but also a whole lot of other things like Carbon Price Support, the Emissions Trading Scheme, the auctioning of seabed leases that the Crown Estate does. So there's several billion of taxes on electricity that have got no real decarbonization benefit. So if we got rid of the Carbon Price Support, it would make no difference to the amount of low-carbon electricity we procure. That did make a difference to getting coal off the system, but now it's basically just a revenue raiser.

[00:19:51] Ravi Gurumurthy: So I think the Treasury should ask itself: Does it want to get revenue from our electricity bill during an energy crisis, or should we get that money from taxing something else that's a bit less regressive? I know it's not easy to tax anywhere, but we shouldn't really be taxing our electricity bill when we're trying to electrify.

[00:20:06] Ravi Gurumurthy: I think there are other things that we need to consider that are quite radical. One is: Can we delink renewables from gas in terms of price? Now those newer renewables built under Contracts for Difference (CfDs) are already delinked, but the Renewables Obligation stuff that was built before 2013-2014 is still basically reflecting the price of gas. Now they could try to move all of those onto CfDs—now would be quite a good moment, not least because there's quite a lot of political threat from Reform and Kemi Badenoch sort of saying "Look, we'll renege on those contracts." I think there's a bit of almost political leverage to say "Get them onto Contracts for Difference."

[00:20:48] Ravi Gurumurthy: There are other more creative or radical things you could do. You could look at spreading the network infrastructure costs—which are forming a bigger part of the electricity bill—over the whole lifetime of the asset. Can you smooth that? Could you also start co-financing our big offshore wind farms and nuclear with state finance alongside private finance to lower the cost of capital? This is a fundamentally incredibly capital-intensive transition. I thought the whole point of the Panuffle rules—the changes in the fiscal rules—was to try to allow things like this where you know you've got a guaranteed revenue stream, but can you actually use some state finance alongside private finance?

[00:21:27] Joe Owen: So it sounds like there's a sort of opportunity here for a system where we have a bunch of incentives within the way the system works that haven't quite caught up with our electrification journey, and this provides an opportunity to make some of those changes in the heat of a crisis.

[00:21:46] Ravi Gurumurthy: Yeah, and I think that the key thing would be to say we're not just going to let the electricity-to-gas price ratio fluctuate according to whatever is happening—we're going to actually set a goal. We're going to say this has to be at 2.9 or below to 1, that kind of ratio. If you do that, you give great confidence to all the people selling batteries and solar and heat pumps and EVs that they can guarantee that this is going to be much cheaper than the alternative.

[00:22:17] Ravi Gurumurthy: So that's the kind of goal I'd set now. In order to maintain that, you've then got to have a mechanism to stabilize the price. One thing we've been discussing is whether you should create some sort of gas price stabilizer. So when prices are very, very high like now, obviously you're not going to be taxing gas—in fact, you're probably going to end up subsidizing it at some point. But when things start to fall, should you start to tax gas in the same way they're already taxing electricity to keep it at that sort of 2.9 ratio?

[00:22:44] Joe Owen: And you've talked about in a few places there of taxes and subsidies. How do you think the government should be paying for the interventions that it is considering? Some of the stuff that you've proposed is sort of shifting costs around the system, but some of it is moving things that currently come through energy bills into the Exchequer, which is essentially additional costs for the Treasury that they would need to work out how to pay for. Do you have a view on what the best way to pay for it is, or at least what the choices are that the government will need to weigh up?

[00:23:23] Ravi Gurumurthy: So I was involved in putting all the electricity bill... all the blame! I do remember negotiating with the Treasury. But we did make the argument that obviously the first-best idea would be to pay for it through general taxation because this is going to be very regressive at some point.

[00:23:43] Ravi Gurumurthy: But equally, to be honest, during austerity, which is where this was all created, it was much easier to "sneak in" some stealth taxes on electricity bills than put up general taxation. And the problem is even though it is more progressive to say, put up income tax by one penny—which is probably what we're talking about—it's obviously politically more difficult. But that's the kind of choice. I mean, one penny on income tax probably raised about 8 billion pounds. If you took 4-5 billion pounds off electricity bills, you could probably get the gas price to electricity price ratio right.

[00:24:24] Joe Owen: Yeah, I mean it's interesting that these aren't stealth taxes anymore, though, are they? There's a huge amount of focus on them. I mean, who knew that we'd be having regular public debates about ETSs or green levies? It's become really salient over the last few years—I don't think you can get away with it in the same way.

[00:24:39] Joe Owen: Can I ask about North Sea oil, which is obviously one of the things that is a big point of fascination for the government from some of the opposition parties who argue that allowing drilling in fields like Rosebank or Jackdaw would both increase global supply but also raise revenues. If the government is adamant at looking at this from a sort of energy security perspective and want some cash to pay for electrification, should it be looking at opening up access to some of the reserves in the North Sea?

[00:25:19] Ravi Gurumurthy: Well, it's interesting that this just gets so much political and press attention, doesn't it? And I think the first thing is it would make no difference to the actual energy price if you did this, because it's a tiny amount of additional oil or gas you'd get from the field. It wouldn't actually affect the sort of European or global oil and gas prices. So this is not a solution to us paying more for energy.

[00:25:46] Ravi Gurumurthy: What I think it does do, though, is it raises a bit of money for the Treasury. It increases GDP at a time where we probably need as much growth as possible, and it potentially gives some physical security if things really break down. If we're in a terrible situation, having some physical access I think matters. So I think there is a case for doing that. I think you're alluding to the idea: Could you hypothecate? Could you say, "Look, if you do approve Jackdaw, we'll earmark all of that revenue for subsidies for batteries or whatever scheme we're talking about"?

[00:26:26] Joe Owen: Yeah, I think that's right. I think it's an interesting question as to if you are looking to raise revenue to really push forward the electrification agenda, one of the choices on the list that the Chancellor will get presented with, no doubt, will be: Could you use some of the revenues and the proceeds from the North Sea?

[00:26:52] Ravi Gurumurthy: I don't have the numbers to hand, but I think one question would be: How quickly can you get things approved? How much oil or gas would flow? How much actual revenue would come in? And I think unfortunately the answer will be: Not as much as you might like, and takes a lot longer. So you're probably talking about a few hundred million of tax revenue in the next year or two years, not the kind of order of magnitudes bigger that we're often talking about when we're talking about bailouts.

[00:27:17] Joe Owen: So while the sort of link is very pertinent in the sort of media environment between the two things, if you actually looked at it from just a cold hard revenue perspective, it's less of a direct link between the two things, I think.

[00:27:33] Madeleine Gabriel: I think so. I think it'd be worth looking at that, particularly because we already do have windfall taxes in place on oil and gas producers and on renewable energy generators. And I think those were introduced around the time of the last energy crisis. There were quite big forecasts of how much income they would generate for the Treasury, which were then revised down. Those receipts are not hypothecated, but we could expect that the receipts over the next year or so will be higher than currently predicted—that might be another option.

[00:28:04] Madeleine Gabriel: And I think just to voice a note of caution on North Sea oil and gas—as Ravi said, I think there could be a case for reconsidering the government's position, but it's also important to note the symbolism of taking a stand against further drilling. While we're talking about a crisis that is very pertinent now and is genuinely causing big challenges and will flow through to people's ability to pay for everyday things—so I'm not discounting that at all, this is serious—but it is also hopefully quite short-term. The transition away from fossil fuels is something that we need to focus on in the long term, and it just sends a message to—you know, domestically, politically, but also globally—that we're willing to roll back on climate commitments for short-term gain.

[00:28:53] Joe Owen: Yeah, you've seen even just the debate around it has generated commentary from across the world and some developing countries about the opposition for the UK if they were to pursue it. We have talked a bit about what the government can do to support households, how it could drive electrification, and how you might pay for it.

[00:29:15] Joe Owen: But I want to talk about what households can do for themselves, almost outside of big government intervention. Madeleine, I wanted to ask you: What are the sort of big things that households looking to reduce their personal exposure to higher bills in the winter, what are the steps they could take?

[00:29:28] Madeleine Gabriel: Yeah, I mean again it's not been so very long since the last energy crisis, and we did see a dramatic reduction in gas use as a result, which sort of upended the received wisdom that energy use is completely inelastic and that we always use the same amounts. There will be things that people did then that they can't redo, but if they haven't done them yet, they should.

[00:29:55] Madeleine Gabriel: So for example, if you don't have loft insulation, or if you've got very little, now would be a great time to think about that. The reason people don't do it is because often they have lots of stuff in the loft and it's a pain to get it out and reinsulate, but why not think about winter ahead of time and go for it? Draft-proofing is another no-brainer, and it does frequently need redoing. I went around my garage with some draft-proofing strips and they've now come off, so I'm going to need to do that again.

[00:30:24] Madeleine Gabriel: So again, think of these next few months as a time to prepare for winter. You can use a gas boiler more efficiently—a few years ago we set up a campaign called the Money Saving Boiler Challenge. It's still online; it tells you how to reduce the flow temperature of your boiler so that it will run more efficiently, and that could save around 7%, 8%, 9% of your gas use for heating. All of these things do make a tangible difference.

[00:30:46] Madeleine Gabriel: And then for those who have the ability and the sort of willingness to go for it now, thinking about home electrification technologies is really worth doing. And as I've said before, we are seeing an uptick in interest and demand for solar panels, batteries, EVs, and heat pumps. Particularly if you're say on heating oil, this would be just a really great time to think about it. And we've heard from people who said they were thinking about it and this has tipped them into action.

[00:31:22] Madeleine Gabriel: Those bigger investments—just showing that I think we may have seen 2022 as a once-in-a-decade or longer aberration, but what we found I think with this crisis is that we can expect more volatility. And so preparing for an electrified future and one where you're using less primary energy has got to be a good thing.

[00:31:44] Joe Owen: Am I right in saying that gas demand dropped by about 10% during the Ukraine crisis?

[00:31:50] Madeleine Gabriel: Yeah, that's right.

[00:31:50] Joe Owen: And has it bounced back?

[00:31:54] Madeleine Gabriel: Not as much, no. I mean there are other things at play as well—warmer winters make a difference—but there was a big drop in gas demand and it hasn't gone up to previous levels, which does suggest that people may have taken some energy-saving actions that have persisted. So things like lowering their boiler flow temperature or insulating their homes.

[00:32:04] Joe Owen: Do you think the government should be doing more to sort of raise awareness of these interventions that households can make?

[00:32:16] Madeleine Gabriel: Definitely. I mean the last government was really allergic to this because they didn't want to tell people what to do. But I think people also wanted to know what to do; you could tell that because the media was just awash with "listicles" of all these energy-saving tips, and some of them frankly were not very good.

[00:32:30] Madeleine Gabriel: I think government can take a role in bringing together evidence-based advice and disseminating it, and could be quite creative in how they get that advice out. So obviously there's the media—bring those broadcasters together, get them to agree on what the core energy-saving tips are and give them the evidence to back that up. But also charities, volunteers, others. We've talked a bit about what it might take to get a million volunteers out to help share energy-saving advice and help put draft-proofing strips around people's doors. And we've seen that in COVID, where people self-organized to help each other—that sort of thing could be facilitated.

[00:33:05] Ravi Gurumurthy: I've got a creative idea: I think we should have a new national bank holiday. A one-off in September where it's DIY day for loft insulation, draft-proofing, and we'll get Martin Lewis to walk the country in the week beforehand.

[00:33:23] Joe Owen: Okay, and we'll have—maybe can we have a VAT reduction on all DIY materials? I mean, this is so British—British people love DIY, don't they? So this is perfect. And bank holidays... although the Treasury doesn't love bank holidays, I don't think. But there's a few things: lower energy use on that day, we're going to be going down to a four-day week anyway.

[00:33:47] Joe Owen: Can we talk for a minute—we've sort of alluded to it on the way through—but the politics of all of this. So the Ukraine invasion sort of suggests that inflation and rising bills are like kryptonite to incumbent governments. But we have also seen, following the higher prices of energy bills, sort of Net Zero being painted as a bit of a "luxury belief" or the pursuit of zealots from some corners of the debate. Can you see a way for the current government here to try and reset the politics of decarbonization through this crisis? Do you think it is all downside risk, or do you think there is an opportunity for them to slightly change the debate?

[00:34:39] Ravi Gurumurthy: I think it's basically all downside risk in the sense that energy bills are terrible for incumbents, because most people aren't really paying attention to what argument you're making, they're just seeing prices go up and they get pissed off about it and blame government.

[00:34:52] Ravi Gurumurthy: But let me try and be more constructive in my answer. Which is, I think as you said, the last two or three years—the last couple of years in particular—it's been Net Zero "zealotry" versus "pragmatism." And the pragmatic people are saying this clean power mission is ideological and mad, and we should be drilling in the North Sea and just forget about EVs and heat pumps.

[00:35:20] Ravi Gurumurthy: I think now you can really argue that the pragmatic choice is electrification—that we should be going "hell for leather" for EVs and heat pumps because they're so much more efficient and you know, they just stop us being exposed to these volatile price spikes that we're getting due to even more global instability. So I think it does make electrification the pragmatic choice. It also makes homegrown renewables and nuclear a really sensible thing because we're again stopping ourselves being exposed.

[00:35:55] Ravi Gurumurthy: So those two aspects of the argument ought to be winning arguments right now. I do think that the North Sea oil and gas debate though complicates that. And even though you can argue it won't make a much of a difference—or any difference—to actual prices, I think the media are sort of fastened onto it. So I think one question would be: Could you neutralize that issue in some way and then bring more attention to the big point, which is we've got to electrify and we've got to do more clean homegrown power?

[00:36:24] Joe Owen: So if you're trying to shift to a view where electrification is the pragmatic option, there are probably some tests coming for the government on whether or not it can prove that it is pragmatic in terms of its approach.

[00:36:36] Ravi Gurumurthy: I mean, it's just so interesting that all people want to talk about is clean power and North Sea gas, and actually they're not the most important issues. We're already... about 65% of our electricity is clean now. If we build out the stuff in the pipeline and that's contracted, it'll be about 80% by 2030, and maybe it'll get to 90% if we do further things. But the only question is really: Is it going to be 80% or 90% decarbonized by 2030? And yet that dominates debate, and so does North Sea oil and gas, when actually they're just not the most important issue.

[00:37:08] Joe Owen: Okay, I'm going to finish by asking you to zoom out a little bit and ask you both a question to sort of close us out. If you were in Keir Starmer's shoes and you were thinking about how to have a real impactful domestic policy agenda following the local elections, and you're thinking what can you do on the 8th of May to show you're back with a "bang" after campaigning—what are the one or two issues that you would obsessively focus on fixing? Ideally outside of what we've talked about today, but I will give you a reprieve if that is where you want to go.

[00:37:51] Madeleine Gabriel: I'll start, and I should caveat by saying that I am not a politics expert—I focus far more on policy. But I mean, I think today we've been talking about energy and I would make a case for focusing on that. It is something that's long-term that can really make a substantial difference to UK's resilience, but also addressing the existential threat of climate change.

[00:38:18] Madeleine Gabriel: But I would balance that with something that's going to have more immediate impact on people's lives and how they feel about daily life. I think personally the focus on reforming Special Educational Needs (SEN) education is really worth seeing through. And I think the government's got some quite constructive proposals that we haven't seen in previous years that could help really shift special education for children and families and save a lot of money, which we know that it's unsustainable the way that it's being run at the moment.

[00:38:52] Madeleine Gabriel: And then maybe so you've got kind of a big long-term strategic issue, you've got something that's tractable which could make a really big difference in the nearer term, and then something that everyone will see and that they really care about—so what about potholes? Something like potholes!

[00:39:10] Joe Owen: Great! Special Educational Needs is definitely a great topic that we should come back to as a future podcast episode. I think, Ravi?

[00:39:15] Ravi Gurumurthy: So I'd do two things that are quite different. One, I would deal with anything to do with affordability, because that's what people care about right now. And broaden it to housing and rent, or childcare or insurance, or any kind of bill—and what can government do to tackle that? But then I think that's necessary to "earn a hearing" and say "We get it" and we get people's immediate concerns.

[00:39:41] Ravi Gurumurthy: But I think we then need to pivot our political debate onto sort of bigger-picture issues which are... you know, the economy is going to go through the biggest change ever through AI, and how do we actually survive and thrive through that? We've already gone through an incredible change in the way that the media and culture and "truth" works, and people are concerned about it with social media for their kids. I think those two issues—what does the online environment look like and what does a world of AI look like—I think governments should be leading those long-term changes as well as dealing with that very pressing affordability crisis. But you need to do both.

[00:40:16] Joe Owen: And anyone interested in the question of our online environment can look at one of our previous podcast episodes which was looking at regulating social media for kids.

[00:40:27] Ravi Gurumurthy: Can I have one more then? Because I think that there are some glimmers of hope in terms of satisfaction in the NHS going up and certain things getting better. And I think it will be so important for any government, but particularly a Labour government, to show real improvement in the NHS in the next year or two. And if they can get that, then I think it provides a very solid "proof point" of what they're trying to do.

[00:40:49] Joe Owen: Great. Ravi, Madeleine, thank you so much. If you enjoyed this episode, please do like, share, and subscribe wherever you get your podcast. Nesta is a research and innovation foundation based in the UK. We design, test, and scale solutions to society's biggest problems. We are funded by a charity endowment and we are politically neutral. If you would like any more information, please go to www.nesta.org.uk.

[00:00:00] Ravi Gurumurthy: I think now you can really argue that the pragmatic choice is electrification—that we should be going "hell for leather" for EVs and heat pumps because they're so much more efficient. And you know, they just stop us being exposed to these volatile price spikes that we're getting due to even more global instability that we've always had.

[00:00:19] Ravi Gurumurthy: So I think it does make electrification the pragmatic choice. It also makes homegrown renewables and nuclear a really sensible thing because we're again stopping ourselves being exposed. This is really because electric technologies are so much more efficient than the technologies they replace. If you think about EVs, they turn about 80% of electricity into motion, whereas a petrol car with an internal combustion engine turns about 20% of petrol into motion. So you know, EVs are four times as efficient. This is really helping to reduce our primary energy demand, not just shifting fuels but reducing how much energy we need. And similarly with heat pumps and gas boilers—you know, a heat pump that's kind of passably efficient, but not "knock it out of the park" efficient, can still be four times as efficient as a gas boiler.

[00:01:11] Joe Owen: Hello, welcome to Policy Fix by Nesta, the research and innovation foundation. I'm Joe Owen. Every episode we take a policy problem and chat to a couple of experts about how to fix it. If you like this episode, please do like, subscribe wherever you get your podcasts, and please do share with all the policy nerds in your life.

[00:01:31] Joe Owen: Before we start, can I say a massive thank you to everyone who listened to our first three episodes. We are so grateful, and particularly grateful for those of you who have subscribed. If you haven't done it already, please do it; it is a massive help to us and also means that you will get a notification every time a new episode lands. We have also really enjoyed all of the comments and feedback, so please do keep those coming.

[00:01:52] Joe Owen: So, yet again, Britons and Europeans face worry and anxiety about their energy bills. We've seen prices rise at the petrol pumps and there is concern of a "bow wave" of costs waiting to make its way through the system and possibly into our food prices, our energy prices in the winter, and also general inflation.

[00:02:13] Joe Owen: So joining us today to talk through what is happening to global energy supplies, what it means for British households, and what the options are facing the UK government, is Ravi Gurumurthy, Chief Executive here at Nesta, and Madeleine Gabriel, Director of Nesta's mission to electrify heat in the UK.

[00:02:32] Joe Owen: I want to start with what we know and what we don't know about the implications for what's going on in the Middle East for our energy supply. Ravi, how and why are we affected?

[00:02:38] Ravi Gurumurthy: Well, obviously affected because about 20% of global oil demand is being passed through the Strait of Hormuz, and that is not able to go through at the moment. I think what we don't know at the moment is how long it's going to last. We don't know how long after the conflict stops there'll be a "hangover." Is there going to be permanent destruction to facilities? What will happen to the way in which oil passes? Will it be taxed essentially through the Strait of Hormuz?

[00:03:09] Ravi Gurumurthy: I think the thing we do know is that this is having an effect—unlike the Ukraine crisis—on both petrol, jet fuel, as well as electricity and gas. So if you think about the Ukraine crisis, it was primarily a gas problem that affected electricity prices and gas prices, but petrol remained relatively okay. Whereas this, I think, is going to be seen more through petrol prices immediately and jet fuel, whereas electricity and gas—partly because of where this has come in the year—will be relatively okay during the summer months and we'll see the bigger effect in winter. And there will also be a lag; so even if things stop, there'll still be a kind of hangover next year.

[00:03:51] Joe Owen: And is there anything UK-specific about the effects? Are we more exposed than other countries on anything, or is it a sort of common impact?

[00:03:58] Ravi Gurumurthy: Well, I think it's a bit of a mixed picture in a way because we don't get very much of our gas and LNG from the Strait of Hormuz, so we're less directly affected physically. But obviously, we're affected indirectly because of the overall demand going up with Asia, in particular, needing more LNG. We're also very, very gas dependent still because we've not got coal on our system—that is a vulnerability. But on the other hand, we've done a huge amount of renewables in the last 20 years. The fact that we've got about 60% of our electricity being renewable helps.

[00:04:31] Joe Owen: Madeleine, Ravi touched on it there, but obviously in 2022 Russia invaded Ukraine and we saw a big spike in energy prices. Could you tell us a bit more about why that was or how that was different to what we're dealing with now?

[00:04:42] Madeleine Gabriel: So, as Ravi said, one of the key differences is that this crisis affects both gas and oil, whereas in 2022 it was primarily a gas price crisis. Another key difference is that the scale is different. So if we look at how gas wholesale prices have changed this time around, about two weeks after the start of the war in Iran, gas wholesale prices have jumped by 70%. But if you compare that to what happened in 2022, it's actually quite a lot less. So, at a sort of comparable time after Russia invaded Ukraine, gas wholesale prices had gone up by 250%.

[00:05:20] Madeleine Gabriel: And the absolute figures are different as well. So you know, at the moment, we've seen gas prices on the wholesale markets jump from 2.5p to about 4.3p, whereas back in 2022 they were already higher—we'd had some other supply shocks—so we saw them jump from something around 6.5p to a spike of about 17p. So you can see how different and how deep the crisis was last time compared with this time.

[00:05:42] Madeleine Gabriel: And we are looking at... you know, I suppose you could say, well, that's a good thing, it's not quite as bad. But of course, we are still looking at quite significant jumps to bills. The current, the most recent projections by Cornwall Insight about what will happen to bills in the summer this year is that our energy bills might go up by around £200. So that's, you know, going to have a real effect on households.

[00:06:11] Madeleine Gabriel: But then again, if you compare that with 2022, we saw energy bills going as high as—you know, they would have gone as high as £4,000 without government intervention. So okay, on the plus side, not quite as bad, but as I said, also affecting oil as well. And that's affecting prices for people filling up on petrol, on diesel. We've seen petrol prices jump about 25p, diesel prices jump about 49p, and heating oil as well prices have doubled. So per liter, heating oil prices have gone up from about 60p to 120p. So it's having an effect across the economy in a different way, but not quite as deep as it was before.

[00:06:47] Joe Owen: So a sort of real and genuine shock but not to the scale that we saw in 2022. Obviously in 2022, as you alluded to, the government did some really big interventions—tens of billions of pounds in terms of support for households. Ravi, obviously as Madeleine said, we're not at that sort of scale of shock yet, but what are the lessons from the kind of interventions that the government made in 2022 that we should be thinking about now, or the government should be thinking about now as it weighs up what to do looking at the winter?

[00:07:16] Ravi Gurumurthy: Yeah, I mean we're not at the scale that we were last time, but that's at this current moment. And I think it's partly assuming that this stops at some point, and also we'll be in a totally different situation in the middle of the winter when demand is much, much higher if this is still in place. I mean if you think back to the Ukraine crisis, what did we do? We basically cut bills for everybody; there was the Energy Price Guarantee. It was incredibly expensive—I think the OBR said we spent about 40-odd billion pounds in that one year. So it was an extraordinarily large intervention.

[00:07:52] Ravi Gurumurthy: The standard question I think you face is: Do you do targeted support or do you do general support? And you give it through cash transfers to people—winter fuel allowance type things—or do you actually try and cut the price itself? And I think it's not intuitive what the right answer is. So actually, there is a good case for cutting electricity prices or gas prices, partly because it can actually reduce inflation.

[00:08:20] Ravi Gurumurthy: So if you think why was the Treasury quite supportive last autumn of cutting electricity prices? It was because it helped to reduce inflation, which then has a big effect on things like benefit levels or public sector pay. Whereas if you just give people cash, it just fuels inflation. So there is a kind of "hard-headed" economic argument for saying do the sort of energy price cut as opposed to cash transfers.

[00:08:46] Ravi Gurumurthy: The problem, I think, is that again from first principles you'd probably want to make this more targeted, but we don't really have a very good mechanism for targeting subsidies at the right place. If you wanted to make this progressive in some way, actually probably use the tax system; you probably give subsidies and then claw it back through the tax system, which is actually progressive. Obviously, that's really hard politically, but in practice what we're doing now almost is increasing taxes after the crisis to claw back the kind of difficult fiscal position we've got ourselves into.

[00:09:16] Joe Owen: I definitely want to come back to the "what are the hard options for the government now." I think your point on scale is really interesting. People can wang around numbers that all sound big—40 billion pounds in a year—we spend about 60 billion pounds a year I think running England's school system as a sort of point of comparison.

[00:09:34] Joe Owen: Madeleine, we can sort of—and we'll get on to talking about the different ways the government could or should respond—but as Ravi said, we have to wait and see what happens and not understand quite yet what the trajectory might be. How do you think the government should decide when to respond and how should it calibrate scale? What are the signals that you're looking out for that would suggest it's time for intervention from the government in a big way?

[00:10:04] Madeleine Gabriel: I think there's a few things you could think about. One is about giving people confidence that the government is going to do something. And I think actually the early announcement on heating oil support was helpful in that sense. Rachel Reeves got up and said she was going to put aside 53 million pounds for heating oil support; she actually didn't say who it would go to, apart from that it would be targeted, but at least that gives people some confidence that as they're thinking about going into winter, that there will be some support available.

[00:10:28] Madeleine Gabriel: So one thing is about just what can we tell people that's going to assuage their concerns to some extent. I think another point is that there is a far stronger case in my view for supporting household energy bills than household fuel bills, because the effect on what we pay for our home energies is going to be larger than what we might pay for driving around. And while it's not true of everyone—some people really rely on their cars—most drivers will have some easier ways of reducing their spend on fuel than they will on energy.

[00:11:03] Madeleine Gabriel: I suppose in terms of scale, I mean last time the government effectively capped the average bill at £2,500. As I said earlier, we're now currently for July looking at bills that are about £200 higher than they are now—I think the most recent prediction suggests that the average bill from July could be £1,850 or so. So we're some way off £2,500, and bills have actually been at that level without people talking about support as recently as last spring. So it really does depend on what happens in the winter. And I think we'll get some sense of where prices are going from the summer when we start seeing energy companies buying forward contracts and Ofgem will start having a sense of what the winter prices are likely to be like.

[00:11:54] Ravi Gurumurthy: I think it's an interesting point about giving people confidence now about what they can and can't spend in the future. Because if you think about the last year, all the speculation about tax increases was a terrible backdrop for the economy, and now we're having the same situation where people are thinking "Oh my God, what's the next year going to look like?" So even on fuel duty, the government isn't really saying what it will do, even though we all assume they will do something if it persists. And I think almost saying "These are the kinds of packages we will offer under different circumstances" might be a way of just engendering a bit more confidence that you know, people don't need to maybe worry as much as they are doing.

[00:12:35] Joe Owen: Even the principles through which will guide their decisions—so again, if the government doesn't want to stop short of saying "These are the specific packages on the table," even just as you say, providing some information about when and how they will make decisions on intervening.

[00:12:53] Joe Owen: Okay, I want to get into the sort of hard options then for intervention from the government, and in particular, what are the big radical options that might reduce the UK's exposure to future risks? So we'll start with bills and supporting households. Ravi, you've touched on this a bit, but is the choice between expanding targeted transfers versus general support? What is on the table, and how should the government weigh the options?

[00:13:22] Ravi Gurumurthy: Yeah, so I think the typical choice is between expanding targeted payments—Cold Weather Payments, Winter Fuel Payments, benefits—versus saying we're going to do another Energy Price Guarantee. I think that will depend on the size of the shock. If it's enormous and they just need to help everybody, then I think they will be in exactly the same position as Ukraine. If they can get away with it, they prefer to do a more targeted package.

[00:13:52] Ravi Gurumurthy: I think the difficulty is that it's quite hard to get it to the right people. So you have people with large fuel bills, but maybe just above the threshold for certain benefits. So there are lots and lots of losers who will not be picked up by current targeting mechanisms because we don't really have good information on people's actual energy use and the ability to match those people to benefits.

[00:14:17] Ravi Gurumurthy: So I think because of that inability to target well, I'd be surprised if there isn't something more general. And as I said, then the choice is: Should you just give it through a cash payment—a check in the post—or should you do it through actually cutting the energy bill? Last time it was done very quickly and effectively, and as I said, it does reduce inflation in that way, which then feeds into decisions on public sector pay and benefits and pensions and so on. So that's why I think what might be a strange thing to do—which is suddenly subsidize bills—becomes quite rational if we're in that high-inflation period. But I think the first option will be to try to do something slightly more targeted if the spike is less big.

[00:15:06] Joe Owen: So there's quite a big tipping point from where you go from using existing mechanisms that exist to do something quite targeted, to being quite quickly onto big generalized subsidy.

[00:15:20] Madeleine Gabriel: I suppose a third option, or it's a bit like the big generalized subsidy, might be to go a bit further on some of the measures that Rachel Reeves announced in the budget last year where she took some of the costs off energy bills—specifically off electricity bills. So she removed 75% of the cost of the Renewables Obligation, which is the biggest green levy on bills, and took that into the Exchequer. There's still some of that left, though, and there's still some other levies, and that could be a change that would affect everyone's bills but also be a longer-term shift in the cost of electricity. From our perspective, that would help redress the balance between electricity and gas prices.

[00:16:00] Joe Owen: I'd like to come back to you on this actually, because my next question was going to be about kind of driving investment towards the government's electrification ambitions. And if it wanted to ensure that any of the sort of fiscal firepower and the money it puts on the table doesn't just go into bailing out households today but materially reduces the UK's exposure to future shocks, what should the government be doing if it wanted to really turbocharge electrification as part of this crisis? What do you think it should be considering and weighing up?

[00:16:28] Madeleine Gabriel: Just to start off with, I just wanted to point out how important a tool electrification is in reducing our reliance on fossil fuels. I mean, this is really because electric technologies are so much more efficient than the technologies they replace. If you think about EVs, they turn about 80% of electricity into motion, whereas a petrol car with an internal combustion engine turns about 20% of petrol into motion. So EVs are four times as efficient. This is really helping to reduce our primary energy demand, not just shifting fuels but reducing how much energy we need. And similarly with heat pumps and gas boilers—you know, a heat pump that's kind of passably efficient but not "knock it out the park" efficient can still be four times as efficient as a gas boiler. And that means that if we're switching from boilers to heat pumps, we are reducing our gas demand in total, even if we generate all the additional electricity with gas. So this is a really important tool that we can put at our disposal.

[00:17:29] Madeleine Gabriel: In terms of turbocharging electrification, I think reducing electricity prices relative to gas is probably the key lever. And one of the interesting things we might expect to see—or in fact we are already seeing with the price changes that have come through so far—is that the ratio between gas prices and electricity prices has already started to narrow. That will be because, you know, we're seeing a shock to gas prices. So we use gas directly when we burn it in our homes, we also use it to generate electricity, but in terms of our gas bill, the wholesale price forms a bigger part of the overall bill, whereas in electricity the wholesale price is a smaller part—there are other costs. So we're already seeing that that ratio narrowing a bit, and government could go further to narrow it.

[00:18:15] Madeleine Gabriel: And we're also seeing people getting interested in home electrification technologies. I think over the last few weeks there's been a rash of articles from energy suppliers and others saying how demand for heat pumps, solar panels, and batteries has gone up—and EVs. Some people are just thinking, "I don't want to be exposed to these things. What can I do?"

[00:18:36] Joe Owen: Yeah, if the government wanted to capitalize on that, Ravi, and really make the most of it, what do you think it could be considering?

[00:18:41] Ravi Gurumurthy: Well, I mean, this first point is it would be different, I think, if they reacted not just with a sort of subsidy for everybody, but a way that was trying to shift our whole energy use into a different footing. So as Madeleine said, energy efficiency is key. The key to efficiency is actually electrification—that's how you get three or four times more efficient. And then the key to electrification is cheaper electricity.

[00:19:04] Ravi Gurumurthy: On the sort of cheaper electricity side, as Madeleine said, you could—there's quite a lot of tax on the electricity bill that isn't on the gas bill. So the Renewables Obligation that Madeleine talked about, but also a whole lot of other things like Carbon Price Support, the Emissions Trading Scheme, the auctioning of seabed leases that the Crown Estate does. So there's several billion of taxes on electricity that have got no real decarbonization benefit. So if we got rid of the Carbon Price Support, it would make no difference to the amount of low-carbon electricity we procure. That did make a difference to getting coal off the system, but now it's basically just a revenue raiser.

[00:19:51] Ravi Gurumurthy: So I think the Treasury should ask itself: Does it want to get revenue from our electricity bill during an energy crisis, or should we get that money from taxing something else that's a bit less regressive? I know it's not easy to tax anywhere, but we shouldn't really be taxing our electricity bill when we're trying to electrify.

[00:20:06] Ravi Gurumurthy: I think there are other things that we need to consider that are quite radical. One is: Can we delink renewables from gas in terms of price? Now those newer renewables built under Contracts for Difference (CfDs) are already delinked, but the Renewables Obligation stuff that was built before 2013-2014 is still basically reflecting the price of gas. Now they could try to move all of those onto CfDs—now would be quite a good moment, not least because there's quite a lot of political threat from Reform and Kemi Badenoch sort of saying "Look, we'll renege on those contracts." I think there's a bit of almost political leverage to say "Get them onto Contracts for Difference."

[00:20:48] Ravi Gurumurthy: There are other more creative or radical things you could do. You could look at spreading the network infrastructure costs—which are forming a bigger part of the electricity bill—over the whole lifetime of the asset. Can you smooth that? Could you also start co-financing our big offshore wind farms and nuclear with state finance alongside private finance to lower the cost of capital? This is a fundamentally incredibly capital-intensive transition. I thought the whole point of the Panuffle rules—the changes in the fiscal rules—was to try to allow things like this where you know you've got a guaranteed revenue stream, but can you actually use some state finance alongside private finance?

[00:21:27] Joe Owen: So it sounds like there's a sort of opportunity here for a system where we have a bunch of incentives within the way the system works that haven't quite caught up with our electrification journey, and this provides an opportunity to make some of those changes in the heat of a crisis.

[00:21:46] Ravi Gurumurthy: Yeah, and I think that the key thing would be to say we're not just going to let the electricity-to-gas price ratio fluctuate according to whatever is happening—we're going to actually set a goal. We're going to say this has to be at 2.9 or below to 1, that kind of ratio. If you do that, you give great confidence to all the people selling batteries and solar and heat pumps and EVs that they can guarantee that this is going to be much cheaper than the alternative.

[00:22:17] Ravi Gurumurthy: So that's the kind of goal I'd set now. In order to maintain that, you've then got to have a mechanism to stabilize the price. One thing we've been discussing is whether you should create some sort of gas price stabilizer. So when prices are very, very high like now, obviously you're not going to be taxing gas—in fact, you're probably going to end up subsidizing it at some point. But when things start to fall, should you start to tax gas in the same way they're already taxing electricity to keep it at that sort of 2.9 ratio?

[00:22:44] Joe Owen: And you've talked about in a few places there of taxes and subsidies. How do you think the government should be paying for the interventions that it is considering? Some of the stuff that you've proposed is sort of shifting costs around the system, but some of it is moving things that currently come through energy bills into the Exchequer, which is essentially additional costs for the Treasury that they would need to work out how to pay for. Do you have a view on what the best way to pay for it is, or at least what the choices are that the government will need to weigh up?

[00:23:23] Ravi Gurumurthy: So I was involved in putting all the electricity bill... all the blame! I do remember negotiating with the Treasury. But we did make the argument that obviously the first-best idea would be to pay for it through general taxation because this is going to be very regressive at some point.

[00:23:43] Ravi Gurumurthy: But equally, to be honest, during austerity, which is where this was all created, it was much easier to "sneak in" some stealth taxes on electricity bills than put up general taxation. And the problem is even though it is more progressive to say, put up income tax by one penny—which is probably what we're talking about—it's obviously politically more difficult. But that's the kind of choice. I mean, one penny on income tax probably raised about 8 billion pounds. If you took 4-5 billion pounds off electricity bills, you could probably get the gas price to electricity price ratio right.

[00:24:24] Joe Owen: Yeah, I mean it's interesting that these aren't stealth taxes anymore, though, are they? There's a huge amount of focus on them. I mean, who knew that we'd be having regular public debates about ETSs or green levies? It's become really salient over the last few years—I don't think you can get away with it in the same way.

[00:24:39] Joe Owen: Can I ask about North Sea oil, which is obviously one of the things that is a big point of fascination for the government from some of the opposition parties who argue that allowing drilling in fields like Rosebank or Jackdaw would both increase global supply but also raise revenues. If the government is adamant at looking at this from a sort of energy security perspective and want some cash to pay for electrification, should it be looking at opening up access to some of the reserves in the North Sea?

[00:25:19] Ravi Gurumurthy: Well, it's interesting that this just gets so much political and press attention, doesn't it? And I think the first thing is it would make no difference to the actual energy price if you did this, because it's a tiny amount of additional oil or gas you'd get from the field. It wouldn't actually affect the sort of European or global oil and gas prices. So this is not a solution to us paying more for energy.

[00:25:46] Ravi Gurumurthy: What I think it does do, though, is it raises a bit of money for the Treasury. It increases GDP at a time where we probably need as much growth as possible, and it potentially gives some physical security if things really break down. If we're in a terrible situation, having some physical access I think matters. So I think there is a case for doing that. I think you're alluding to the idea: Could you hypothecate? Could you say, "Look, if you do approve Jackdaw, we'll earmark all of that revenue for subsidies for batteries or whatever scheme we're talking about"?

[00:26:26] Joe Owen: Yeah, I think that's right. I think it's an interesting question as to if you are looking to raise revenue to really push forward the electrification agenda, one of the choices on the list that the Chancellor will get presented with, no doubt, will be: Could you use some of the revenues and the proceeds from the North Sea?

[00:26:52] Ravi Gurumurthy: I don't have the numbers to hand, but I think one question would be: How quickly can you get things approved? How much oil or gas would flow? How much actual revenue would come in? And I think unfortunately the answer will be: Not as much as you might like, and takes a lot longer. So you're probably talking about a few hundred million of tax revenue in the next year or two years, not the kind of order of magnitudes bigger that we're often talking about when we're talking about bailouts.

[00:27:17] Joe Owen: So while the sort of link is very pertinent in the sort of media environment between the two things, if you actually looked at it from just a cold hard revenue perspective, it's less of a direct link between the two things, I think.

[00:27:33] Madeleine Gabriel: I think so. I think it'd be worth looking at that, particularly because we already do have windfall taxes in place on oil and gas producers and on renewable energy generators. And I think those were introduced around the time of the last energy crisis. There were quite big forecasts of how much income they would generate for the Treasury, which were then revised down. Those receipts are not hypothecated, but we could expect that the receipts over the next year or so will be higher than currently predicted—that might be another option.

[00:28:04] Madeleine Gabriel: And I think just to voice a note of caution on North Sea oil and gas—as Ravi said, I think there could be a case for reconsidering the government's position, but it's also important to note the symbolism of taking a stand against further drilling. While we're talking about a crisis that is very pertinent now and is genuinely causing big challenges and will flow through to people's ability to pay for everyday things—so I'm not discounting that at all, this is serious—but it is also hopefully quite short-term. The transition away from fossil fuels is something that we need to focus on in the long term, and it just sends a message to—you know, domestically, politically, but also globally—that we're willing to roll back on climate commitments for short-term gain.

[00:28:53] Joe Owen: Yeah, you've seen even just the debate around it has generated commentary from across the world and some developing countries about the opposition for the UK if they were to pursue it. We have talked a bit about what the government can do to support households, how it could drive electrification, and how you might pay for it.

[00:29:15] Joe Owen: But I want to talk about what households can do for themselves, almost outside of big government intervention. Madeleine, I wanted to ask you: What are the sort of big things that households looking to reduce their personal exposure to higher bills in the winter, what are the steps they could take?

[00:29:28] Madeleine Gabriel: Yeah, I mean again it's not been so very long since the last energy crisis, and we did see a dramatic reduction in gas use as a result, which sort of upended the received wisdom that energy use is completely inelastic and that we always use the same amounts. There will be things that people did then that they can't redo, but if they haven't done them yet, they should.

[00:29:55] Madeleine Gabriel: So for example, if you don't have loft insulation, or if you've got very little, now would be a great time to think about that. The reason people don't do it is because often they have lots of stuff in the loft and it's a pain to get it out and reinsulate, but why not think about winter ahead of time and go for it? Draft-proofing is another no-brainer, and it does frequently need redoing. I went around my garage with some draft-proofing strips and they've now come off, so I'm going to need to do that again.

[00:30:24] Madeleine Gabriel: So again, think of these next few months as a time to prepare for winter. You can use a gas boiler more efficiently—a few years ago we set up a campaign called the Money Saving Boiler Challenge. It's still online; it tells you how to reduce the flow temperature of your boiler so that it will run more efficiently, and that could save around 7%, 8%, 9% of your gas use for heating. All of these things do make a tangible difference.

[00:30:46] Madeleine Gabriel: And then for those who have the ability and the sort of willingness to go for it now, thinking about home electrification technologies is really worth doing. And as I've said before, we are seeing an uptick in interest and demand for solar panels, batteries, EVs, and heat pumps. Particularly if you're say on heating oil, this would be just a really great time to think about it. And we've heard from people who said they were thinking about it and this has tipped them into action.

[00:31:22] Madeleine Gabriel: Those bigger investments—just showing that I think we may have seen 2022 as a once-in-a-decade or longer aberration, but what we found I think with this crisis is that we can expect more volatility. And so preparing for an electrified future and one where you're using less primary energy has got to be a good thing.

[00:31:44] Joe Owen: Am I right in saying that gas demand dropped by about 10% during the Ukraine crisis?

[00:31:50] Madeleine Gabriel: Yeah, that's right.

[00:31:50] Joe Owen: And has it bounced back?

[00:31:54] Madeleine Gabriel: Not as much, no. I mean there are other things at play as well—warmer winters make a difference—but there was a big drop in gas demand and it hasn't gone up to previous levels, which does suggest that people may have taken some energy-saving actions that have persisted. So things like lowering their boiler flow temperature or insulating their homes.

[00:32:04] Joe Owen: Do you think the government should be doing more to sort of raise awareness of these interventions that households can make?

[00:32:16] Madeleine Gabriel: Definitely. I mean the last government was really allergic to this because they didn't want to tell people what to do. But I think people also wanted to know what to do; you could tell that because the media was just awash with "listicles" of all these energy-saving tips, and some of them frankly were not very good.

[00:32:30] Madeleine Gabriel: I think government can take a role in bringing together evidence-based advice and disseminating it, and could be quite creative in how they get that advice out. So obviously there's the media—bring those broadcasters together, get them to agree on what the core energy-saving tips are and give them the evidence to back that up. But also charities, volunteers, others. We've talked a bit about what it might take to get a million volunteers out to help share energy-saving advice and help put draft-proofing strips around people's doors. And we've seen that in COVID, where people self-organized to help each other—that sort of thing could be facilitated.

[00:33:05] Ravi Gurumurthy: I've got a creative idea: I think we should have a new national bank holiday. A one-off in September where it's DIY day for loft insulation, draft-proofing, and we'll get Martin Lewis to walk the country in the week beforehand.

[00:33:23] Joe Owen: Okay, and we'll have—maybe can we have a VAT reduction on all DIY materials? I mean, this is so British—British people love DIY, don't they? So this is perfect. And bank holidays... although the Treasury doesn't love bank holidays, I don't think. But there's a few things: lower energy use on that day, we're going to be going down to a four-day week anyway.

[00:33:47] Joe Owen: Can we talk for a minute—we've sort of alluded to it on the way through—but the politics of all of this. So the Ukraine invasion sort of suggests that inflation and rising bills are like kryptonite to incumbent governments. But we have also seen, following the higher prices of energy bills, sort of Net Zero being painted as a bit of a "luxury belief" or the pursuit of zealots from some corners of the debate. Can you see a way for the current government here to try and reset the politics of decarbonization through this crisis? Do you think it is all downside risk, or do you think there is an opportunity for them to slightly change the debate?

[00:34:39] Ravi Gurumurthy: I think it's basically all downside risk in the sense that energy bills are terrible for incumbents, because most people aren't really paying attention to what argument you're making, they're just seeing prices go up and they get pissed off about it and blame government.

[00:34:52] Ravi Gurumurthy: But let me try and be more constructive in my answer. Which is, I think as you said, the last two or three years—the last couple of years in particular—it's been Net Zero "zealotry" versus "pragmatism." And the pragmatic people are saying this clean power mission is ideological and mad, and we should be drilling in the North Sea and just forget about EVs and heat pumps.

[00:35:20] Ravi Gurumurthy: I think now you can really argue that the pragmatic choice is electrification—that we should be going "hell for leather" for EVs and heat pumps because they're so much more efficient and you know, they just stop us being exposed to these volatile price spikes that we're getting due to even more global instability. So I think it does make electrification the pragmatic choice. It also makes homegrown renewables and nuclear a really sensible thing because we're again stopping ourselves being exposed.

[00:35:55] Ravi Gurumurthy: So those two aspects of the argument ought to be winning arguments right now. I do think that the North Sea oil and gas debate though complicates that. And even though you can argue it won't make a much of a difference—or any difference—to actual prices, I think the media are sort of fastened onto it. So I think one question would be: Could you neutralize that issue in some way and then bring more attention to the big point, which is we've got to electrify and we've got to do more clean homegrown power?

[00:36:24] Joe Owen: So if you're trying to shift to a view where electrification is the pragmatic option, there are probably some tests coming for the government on whether or not it can prove that it is pragmatic in terms of its approach.

[00:36:36] Ravi Gurumurthy: I mean, it's just so interesting that all people want to talk about is clean power and North Sea gas, and actually they're not the most important issues. We're already... about 65% of our electricity is clean now. If we build out the stuff in the pipeline and that's contracted, it'll be about 80% by 2030, and maybe it'll get to 90% if we do further things. But the only question is really: Is it going to be 80% or 90% decarbonized by 2030? And yet that dominates debate, and so does North Sea oil and gas, when actually they're just not the most important issue.

[00:37:08] Joe Owen: Okay, I'm going to finish by asking you to zoom out a little bit and ask you both a question to sort of close us out. If you were in Keir Starmer's shoes and you were thinking about how to have a real impactful domestic policy agenda following the local elections, and you're thinking what can you do on the 8th of May to show you're back with a "bang" after campaigning—what are the one or two issues that you would obsessively focus on fixing? Ideally outside of what we've talked about today, but I will give you a reprieve if that is where you want to go.

[00:37:51] Madeleine Gabriel: I'll start, and I should caveat by saying that I am not a politics expert—I focus far more on policy. But I mean, I think today we've been talking about energy and I would make a case for focusing on that. It is something that's long-term that can really make a substantial difference to UK's resilience, but also addressing the existential threat of climate change.

[00:38:18] Madeleine Gabriel: But I would balance that with something that's going to have more immediate impact on people's lives and how they feel about daily life. I think personally the focus on reforming Special Educational Needs (SEN) education is really worth seeing through. And I think the government's got some quite constructive proposals that we haven't seen in previous years that could help really shift special education for children and families and save a lot of money, which we know that it's unsustainable the way that it's being run at the moment.

[00:38:52] Madeleine Gabriel: And then maybe so you've got kind of a big long-term strategic issue, you've got something that's tractable which could make a really big difference in the nearer term, and then something that everyone will see and that they really care about—so what about potholes? Something like potholes!

[00:39:10] Joe Owen: Great! Special Educational Needs is definitely a great topic that we should come back to as a future podcast episode. I think, Ravi?

[00:39:15] Ravi Gurumurthy: So I'd do two things that are quite different. One, I would deal with anything to do with affordability, because that's what people care about right now. And broaden it to housing and rent, or childcare or insurance, or any kind of bill—and what can government do to tackle that? But then I think that's necessary to "earn a hearing" and say "We get it" and we get people's immediate concerns.

[00:39:41] Ravi Gurumurthy: But I think we then need to pivot our political debate onto sort of bigger-picture issues which are... you know, the economy is going to go through the biggest change ever through AI, and how do we actually survive and thrive through that? We've already gone through an incredible change in the way that the media and culture and "truth" works, and people are concerned about it with social media for their kids. I think those two issues—what does the online environment look like and what does a world of AI look like—I think governments should be leading those long-term changes as well as dealing with that very pressing affordability crisis. But you need to do both.

[00:40:16] Joe Owen: And anyone interested in the question of our online environment can look at one of our previous podcast episodes which was looking at regulating social media for kids.

[00:40:27] Ravi Gurumurthy: Can I have one more then? Because I think that there are some glimmers of hope in terms of satisfaction in the NHS going up and certain things getting better. And I think it will be so important for any government, but particularly a Labour government, to show real improvement in the NHS in the next year or two. And if they can get that, then I think it provides a very solid "proof point" of what they're trying to do.

[00:40:49] Joe Owen: Great. Ravi, Madeleine, thank you so much. If you enjoyed this episode, please do like, share, and subscribe wherever you get your podcast. Nesta is a research and innovation foundation based in the UK. We design, test, and scale solutions to society's biggest problems. We are funded by a charity endowment and we are politically neutral. If you would like any more information, please go to www.nesta.org.uk.