How Britain’s next Prime Minister could prevent catastrophic energy bills

There is still almost a month in the race to become Britain’s next Prime Minister, but the first major crisis for Number 10 is already clear: mounting energy prices.

Cataclysmic costs are on the way for households with the regulatory cap to rise as high as £3,687 in October and £4,400 in January, according to consultancy Auxilione.

The Bank of England expects the costs to force the UK into a recession which lasts for more than a year.

In debates between leadership contenders Liz Truss and Rishi Sunak, the pair have so far focused on tax cuts to prevent millions facing unaffordable heating bills - or at least cancelling recent and planned tax rises.

But that will not be enough. Reversing Sunak’s national insurance raid, as Truss has pledged, might be welcome to millions of workers clobbered with higher taxes from April, but it only gets them back to square one rather than granting any real help.

Recognising the Government should not be pushing prices up, Sunak has pledged to cut VAT on household energy bills. But removing this 5pc levy is just a drop in the ocean relative to the price increases over the past year, let alone those to come.

What could the next PM do to help prevent an energy catastrophe?

Bring bills down

Direct steps to bring down bills have formed a key part of efforts so far. Sunak maintains his support package is the best combination of universal support to hold down costs, with extra aid for those on low incomes.

In February the former chancellor offered loans of £200 per household. In May, that turned into a £400 grant which would go to energy companies and appear as credit in households’ energy accounts.

Sunak is pushing this as the answer to tackling upcoming energy price increases.

If bills rise in the region of another £500 more than was expected in May, that might translate to around £250 of further support to limit the pain for households.

Carl Emmerson at the Institute for Fiscal Studies (IFS) says further support would be straightforward in practical terms: “Having got the £400 payment set up, you can make it bigger if you want to pretty quickly.”

Other countries have tried a variety of schemes, with the French authorities ordering state-backed EDF to sell energy at

below the market price to other suppliers.

Yet that method is not an option in Britain, given the structure of ownership in the UK. Emmerson notes it also risks undermining incentives to cut energy use by offering households a distorted low price per unit.

Meanwhile in Spain the Government has slashed VAT on bills. The tax began at 25pc, some five-times the 5pc in the UK, meaning a similar move by Whitehall would make rather less difference.

Push incomes up

Instead of bringing bills down, incomes could go up, especially for those with lower earnings.

Andy Mayer at the Institute of Economic Affairs (IEA) says “welfare recipients will need a boost”.

“There is no better way of doing it. Targeted support on energy bills adds a layer of complexity to the welfare system which is very hard to reverse when prices fall again.

“You tend to be better off using the system you have already got, which is universal credit in the main.”

Rebecca McDonald, at the Joseph Rowntree Foundation, says the £1,200 support given to lower income families - which includes the £150 council tax cut and £400 credit on energy bills, as well as two extra payments - should be doubled.

“Given we now have new inflation forecasts and we now expect the energy price cap rise in October to be so much higher than we initially expected, these wipe out a lot of that support already, and means that package is no longer adequate,” she says, proposing more “lump sum payments through the benefits system”.

Cutting national insurance contributions will help workers take home more money, though it may not be possible to implement before the price cap goes up.

IFS’ Emmerson says it may well take until January before a cut could come into force.

Slash green tape

Truss has promised to scrap the green levies on energy bills, moving the costs into general Government spending.

Mayer at the IEA estimates this will remove £90 to £100 from bills, but calls it “a bit of a trick” as it merely changes who pays the cost rather than removing it altogether.

He argues subsidies for green energy should be more fundamentally reformed.

“What you could do is simply cap the renewables obligation to a level that was deemed a fair return, much in the same way as the new green levy, the CFD, is charged,” Mayer says.

“There is no justification at all for anybody getting the current market price to also be receiving the renewables obligation buyout price on top as a subsidy element.”

Cut energy usage

A key problem with financial support across all households is the extreme expense. Measures announced so far clock in at £37bn.

Mike Brewer at the Resolution Foundation says this is affordable as a one-off, but cannot be maintained if energy prices keep rising next year, as analysts fear they will.

“Whatever the Government comes up with, it has got to be prepared to do not just this winter but the following winter,” he says.

One element of the green levies is the Energy Company Obligation, a charge which goes towards measures to improve energy efficiency for low income households.

Ed Matthew at think tank E3G says expanding this from £1bn to £2bn would help households quickly and reduce costs for the Government if the energy crisis is prolonged.

Insulating all of the homes which need it “will take 10 to 20 years to get it done, but if they had a booster programme they could probably do a couple of hundred thousand extra homes this winter,” he says.

“That is a couple of hundred thousand homes which could have lower bills this winter, and if you focus that on some of the most deprived, vulnerable households, that could be very valuable and it could also save lives.”

A sustained programme could slash bills for millions over the coming years, and make the country less reliant on volatile global gas prices.

“How can you justify spending £37bn on a one-off subsidy of energy bills, then spend no more than they are spending now on reducing our dependency on gas?” he says.