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Energy Price Guarantee: How Will Liz Truss’s Plan To Freeze Energy Bills At £2,500 Work?

Energy Price Guarantee: How Will Liz Truss’s Plan To Freeze Energy Bills At £2,500 Work?

Liz Truss has outlined plans to cap the average household energy bill at £2,500 for the next two years (Alamy)

10 min read

New Prime Minister Liz Truss has announced a bold new package of support to try and blunt the impact of soaring energy prices and keep average bills below £2,500 for the next two years.

Following criticism that the government was failing to offer households support to see them through a difficult winter, with bills due to reach unprecedented levels, in part as a result of the Russian invasion of Ukraine and its impact on gas prices, she outlined her long-awaited plans in the Commons this morning.

Truss claimed plans would “save a typical household £1,000 a year” by freezing the domestic energy cap so that bills will not rise to the previously expected £3,549. She also told MPs the government will support businesses facing spiralling costs for the next six months.

An Energy Supply Taskforce will also be created to help secure further sources of energy in the future and improve the UK’s resilience to outside pressures, as well as a controversial decision to end the moratorium on shale gas extraction, known as fracking.

Here are the details of how the plans will work:

What has been announced?

The main thrust of the proposals is an “Energy Price Guarantee”, which replaces the existing price cap as set by regulator Ofgem, and is achieved by the government artificially depressing the price of wholesale gas and electricity prices.

Currently the price cap is set at £1,971, but was set to rise to £3,549 in October because of continued rising wholesale costs.

Forecasters predict it will hit more than £5,000 in January and as much as £6,000 in April, which would see millions of people unable to pay their bills.

Instead the average household bill will be capped at £2,500 for the next two years, “while we get the energy market back on track”, Truss confirmed.

This includes the removal of the green levy, which could add up to £150 a year to bills, for two years.

What other help will there be?

This new cap will come on top of the previously announced Energy Bills Support Scheme of £400, spread over six months from October to March.

There is also a £650 fund for benefit claimants, of which half has already been paid out, along with £300 for pensioners and £150 for people with disabilities. None of these payments are available until winter 2023/24, and although the new average cost figures are far lower than they would be under the Ofgem price cap, they are still much higher than they were last winter, when the figure for an average household was only £1,277.

Truss also said a fund would be set up for those who are not on standard energy systems, for example those in blocks of flats that share a heating system, and are not currently covered by the cap.

”For those using heating oil, living in park homes, or those on heat networks, we will set up a fund so that all UK consumers can benefit from equivalent support," she said. 

How will it work?

For households, the government will give domestic suppliers like British Gas funding so they can sell gas and electricity below how much they are to purchase it from the wholesale market.

For commercial energy supplies it is slightly different, as the unit prices vary by type of business, so the government will subsidise the wholesale price the supplier pays.

Further detail of this and how it will impact bills will be announced in the coming days by the Department for Business, Energy and Industrial Strategy.

How much will it cost?

So far the government has not put a figure on the cost, as it relies on the wholesale cost of energy over the next two years, which is likely to fluctuate wildly –  but estimates suggest it could be up to £150bn.

The costing will be detailed at a planned fiscal event led by Chancellor Kwasi Kwarteng later this month.

It will be funded by extra public borrowing and then paid back through taxation, as Truss has rejected Labour’s plans to claw back some of the cost from the energy generators by a further windfall tax.

"I can tell the House today that we will not be giving in to the Leader of the Opposition who calls for this to be funded through a windfall tax,” she said.

"That would undermine the national interest by discouraging the very investment we need to secure homegrown energy supplies."

The PM also claimed the scheme will cut the peak of inflation by 5 per cent, thereby helping with the wider cost of living issues and the cost of servicing the country’s debt.

Will businesses be affected?

Truss outlined a scheme for businesses, schools, hospitals, other public organisations and charities, which will “offer equivalent support” but last for just six months, rather than the two-year guarantee for domestic bills.

She said “vulnerable” industries will receive longer-term support that will be set out later, and a review in three months will decide which sectors should receive ongoing help.

Truss told MPs: "We will also support all businesses, charities and public sector organisations with their energy costs this winter offering an equivalent guarantee for six months.

"After those six months, we will provide further support to vulnerable sectors such as hospitality, including our local pubs."

She said the Business Secretary will work with business to review where the additional support would be targeted, saying the review will be concluded within three months "giving businesses certainty".

"In the meantime, companies with the wherewithal need to be looking for ways they can improve energy efficiency and increase direct energy generation," Truss said.

It is unclear what will happen to business that have already signed energy contracts at far higher costs in recent weeks.

What else did she announce?

The PM announced that more drilling for oil and gas in the UK will take place.

“We will be launching a new licensing round which we expect to lead to over 100 new licences being awarded," she said. 

Truss pledged to make sure the UK is a net energy exporter by 2040 – and to lay out a plan in the next two months to make sure we achieve this.

Truss said the government will launch two reviews, one on energy regulation “to fix the underlying problems”, and a second “to ensure we deliver net zero by 2050 in a way that is pro-business and pro-growth”, which will be led by the former minister – and key Truss ally – Chris Skidmore.

"The reason we are in this difficult situation is because of Putin's appalling war in Ukraine, but we do need to make sure our energy supplies are more resilient and more secure so we are never in this situation again, and we cannot be subject to global energy prices and the actions of dictators,” she said.

More controversially a three-year-old ban on fracking is being lifted from today, and gas extracted in this way could be flowing in “six months”, but the PM has vowed it will only happen “where there is local support”.

The government is producing a report from the British Geological Survey after safety concerns shut down the practice before.

How has it been received?

The chair of the Business, Energy and Industrial Strategy Committee, Labour MP Darren Jones, said, “Although many are relieved that their energy bills will rise little further for the time-being, we must not forget that more than a million are set to sink into poverty without further support and will still be forced to make the stark choice between heating and eating this winter.

“The level at which prices will be frozen is still more than double the price it was last summer.”

He said whilst welcome “this is a temporary response to an urgent issue” and called for ministers to invest in home insulation and a further expansion of renewable energy, adding: “Fracking and new drilling in the North Sea will do nothing to change prices and won’t produce new energy for at least half a decade.

“They will however make it much harder for the UK to hit its net zero targets to tackle climate change.”

Georgia Whitaker, oil and gas campaigner for Greenpeace UK, said: 

“Proposing fracking is less a solution to the UK’s energy issues and more of an attempt to distract us from them. It will not lower bills. It will not make us less dependent on volatile gas markets. It will not reduce our carbon emissions. It may well not work at all because the UK does not have the vast empty expanses of the USA.

“Before the fracking moratorium, the industry had 10 years of the government ‘going all out for shale’ and giving them all the support denied to onshore wind. In that time, the frackers produced no energy for the UK, but managed to create two holes in a muddy field, traffic, noise, earthquakes and enormous controversy. 

“The manifesto promise on which this government was elected was that fracking would not happen unless the science changed, which it most emphatically has not. Communities who have this nonsense inflicted on them in the name of an out-of-date ideology will be wondering who their elected representatives are really representing.”

Rosie Rogers, head of oil and gas for Greenpeace UK, said: "Millions of people will breathe a sigh of relief at being pulled back from the brink of fuel poverty, but it's the fossil fuel giants that will be uncorking the bubbly.

“Liz Truss has decided to let the likes of Shell and BP enjoy the billions they’re making from the enormous suffering caused by the climate and energy crisis, leaving UK taxpayers to foot the bill.

“If that wasn't enough, she's unleashing a drilling frenzy in the North Sea, and fracking in the countryside, which will do nothing to lower energy bills but will boost these companies' profits and unleash more heatwaves, droughts and storms on us all.”

But Francis Egan, the CEO of fracking firm Cuadrilla CEO, welcomed the decision to lift the moratorium on shale gas, adding: “This is an entirely sensible decision and recognises that maximizing the UK’s domestic energy supply is vital if we are going to overcome the ongoing energy crisis and reduce the risk of it recurring in the future.” 

On the domestic bills freeze the charity Action for Children said the plan is "a big intervention with a big hole in it”, while Save the Children said it will not prevent "many" families from reaching crisis point this winter.

Hospitality businesses are one of the industries most at threat from the soaring energy costs, and Steve Alton, CEO of the British Institute of Innkeeping “we are pleased that this has been specifically recognised in today’s announcement”, but awaits “the detail on how this price guarantee will be applied for our nations’ pubs and the impact that this will have on their survival”.

Meanwhile Martin McTague, national chair of the Federation of Small Businesses, said: “It’s a huge relief for millions of small businesses to hear confirmation they will be part of the government’s plans to help on energy. 

“Many have been pushed to the brink by crippling energy bills, and so it is welcome that help is on the way.”.

But he added: “However, the announcement is very high level and sparse on detail so we will be working with the new government to clarify what happens next. Small businesses’ instant reaction is that this is not enough information, yet, for them to plan.”

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