The clamour for the government to intervene to help households with their energy bills grows louder by the day. The Treasury is examining options to alleviate the cost of living crisis, which include extending the existing energy bills support scheme established by the then chancellor, Rishi Sunak, in May. On Thursday, the energy industry united behind its own proposal for a “deficit tariff scheme” to freeze prices at current levels by plugging the gap between wholesale costs and what consumers pay. Here, we examine the merits of the scheme.
What is being proposed?
Energy UK, the industry body for companies that sell electricity and gas to homes and small businesses, is proposing commercial banks put money into a state-backed fund. Retail suppliers could then draw on this fund to freeze customer bills at £1,971 – the current price cap – for two years. The debt built up by suppliers would be repaid by consumers, either through a surcharge on bills or from general taxation over a 10-15 year period. This would protect consumers from an immediate hit, while stopping more suppliers going bust – 29 energy companies have collapsed during the crisis. Many were squeezed by rising wholesale costs they were unable to pass on to consumers because of the price cap. One catch is the scheme would take time to set up, and it may not be ready until next year. Energy UK is suggesting ministers would need to find other money to help households during the coming winter.
Who has suggested this?
Various iterations of this idea have been examined and proposed, but the latest initiative was put forward by ScottishPower and E.ON at a meeting between Boris Johnson and industry last week. Earlier this week, Centrica, which owns British Gas, and Octopus lent their weight to the scheme and on Thursday Energy UK, which counts some of the industry’s biggest players including EDF and Ovo among its membership, came out in support.
What are the risks?
The scheme could be very costly, with some estimates of as much as £60bn. The amount would depend on the length of time the fund is in place and the extent to which gas prices continue to rise. They surged again this week on concerns over potential shortages in Europe this winter in the fallout from the invasion of Ukraine. Russia has reduced the gas it supplies to Europe, and there is a risk it could turn off the taps completely. The involvement of commercial banks also risks handing huge fees, paid for by taxpayers, to the bankers involved in creating the fund. However, the government may prefer this option to funding the scheme via the Treasury.
Is this a good deal for taxpayers?
This will depend on the terms of the deal and how many households are helped – if all 29 million UK households were supported for a year it could cost nearly £60bn if gas prices stay high. If the Treasury chose to create a fund itself, rather than relying on commercial banks, it would have to raise money through government bonds, exposing the taxpayer to future risks in the bond markets during a predicted recession. However, if the Treasury can persuade the banks to take on some of the risk of suppliers defaulting on the loans, it could limit the exposure for taxpayers and present a more palatable option in a highly uncertain energy market.
What other options are available?
Sunak has said if he becomes prime minister he will scrap VAT on fuel bills, which will cost about £12bn and hand all consumers £200. His Tory leadership rival, Liz Truss, favours tax cuts and scrapping green levies, although that will only lower bills by £150. The chancellor, Nadhim Zahawi, has suggested reducing the energy price cap by £400 from January through removing an allowance that suppliers can charge consumers. Labour has said the price cap rises expected in October and January should be scrapped, and funded by backdating the windfall tax – introduced earlier this year on oil and gas companies – from May to January.
Will ministers like the idea?
A similar proposal from suppliers was rejected earlier this year in favour of Sunak’s support package, which was part-funded by a windfall tax on North Sea oil and gas operators. However, predictions for energy bills have since worsened amid rising wholesale gas costs and make further intervention look increasingly inevitable. The tight timeframe before winter bills kick in could prove a block to the deficit fund plan, at least in the short-term.