Industry unites behind plan for crisis fund to control soaring energy bills

The energy industry has united behind a plan to set up a crisis fund that could prevent bills from soaring next year and provide a lifeline for households struggling with the cost of living.

Energy UK, the trade body for the sector, has written to the chancellor, Nadhim Zahawi, to back calls for a “deficit tariff scheme” to be established as a long-term solution to the energy crisis.

Under the plan, commercial banks would put cash into the state-backed fund, which suppliers could then draw on to freeze customers’ bills at the current price cap, £1,971, for two years.

The cost of the scheme would then be paid back over 10 to 15 years through a surcharge on bills or via taxation. However, the scheme could create a debt pile of up to £50bn, far greater than alternatives including Labour leader Keir Starmer’s £29bn plan to freeze the price cap.

The intervention of Energy UK, which counts the industry’s biggest players among its membership, including EDF Energy, Ovo and National Grid, will add further weight to the proposals, which were first floated earlier this year.

The Treasury is assessing ways to support households with the cost of living crisis this winter, with plans to present the incoming prime minister with a menu of options once the contest to replace Boris Johnson concludes on 5 September.

The energy regulator Ofgem is due to announce the level of the next industry price cap on 26 August. Experts expect annual bills to hit £3,582 from 1 October and then top £4,000 from January.

The Guardian revealed this week that Centrica and Ovo supported the idea, which had been presented to government by fellow suppliers ScottishPower and E.ON.

Dhara Vyas, Energy UK’s director of advocacy, said: “Energy bills are set to remain high for the foreseeable future so it will be crucial to put something in place that will shield customers from these. A government-backed loan scheme could help do just that by spreading the costs from an exceptionally volatile few months over a much longer period.

“The high cost of energy, driven by record wholesale gas prices that continue to rise, is unavoidable at present. Suppliers need to recoup these costs otherwise we will see more of them go out of business, adding more expenses and disruption to customers. But this way we can tackle further increases before they hit customer bills.”

The scheme would take time to set up, with details unlikely to be finalised until early next year. Vyas said that in the meantime, the most practical way of providing urgent support this winter would be an increase in the existing support scheme announced by Rishi Sunak in May.

Energy UK argues an increase in the funds handed out through to the energy bills support scheme – which will cut £400 from bills for all households for a six-month period from October – is the quickest way of “providing the support urgently needed by customers ahead of Christmas”.

Robert Buckley, of consultancy Cornwall Insight, said a similar initiative to the deficit fund had been successfully implemented in Spain. “It depends how the fund is structured, who you support and for how long. But this mechanism is proven and has been used effectively in other jurisdictions and I’m sure could work here,” he said.

Energy UK’s letter also called for the establishment of an expert energy panel to study long-term ways of keeping bills affordable for households and businesses. And it wants the government to consider setting up a dedicated department of energy. The industry is under the remit of the Department for Business, Energy and Industrial Strategy.

Separately on Thursday, Ofgem said it had decided not to alter how it covers the cost of supplier failures. The regulator launched a review into the matter in July. It concluded that, while changing the method may benefit some consumers who do not use much energy, the existing calculations better protected users with greater energy needs, such as disabled consumers or those with electric heating not on the gas grid.

On Wednesday it emerged Ofgem director Christine Farnish had resigned, accusing the regulator of favouring businesses over consumers with a rule change that would add as much as £400 to the average UK household energy bill.