Liz Truss sets out plans for government to cover three-quarters of the rise in energy bills this winter, but ducks question of its £120 billion plus price tag 8 September 2022 Liz Truss first major act as Prime Minister has been to set out an energy support package to hugely reduce the scale of the living standards catastrophe this winter by covering three-quarters of the rise in energy bills, but households will still get poorer over the course of the parliament, the Resolution Foundation said today (Thursday) in response to the latest energy bills support announcement. The Foundation’s analysis shows that capping energy prices at £2,500 will save the typical household £1,074 on their energy bills over the next six months. This, together with the previously announced £400 energy bill rebate, covers 76 per cent of the increase in bills compared to last winter (October 2021-March 2022). Today’s announcement will soften the coming squeeze on incomes by reducing short-term inflation by around four percentage points in January 2023 (rising to almost six percentage points for the poorest tenth of households), at the cost of potentially prolonging elevated inflation and/or higher interest rates. The Foundation says that the package of support will protect families from the peaks that energy bills were set to rise to, but will not prevent this winter feeling much tougher for families than they are used to. Pre-payment meter customers will still need to find £264 in cash this January for that month’s energy alone, down from £550 had the government announced no more support. The universal approach to capping prices does a good job of targeting those with the biggest bills – such as large families and those living in poorly insulated homes – and ensures that fewer households fall through the cracks in support. But the inclusion of large support for high-income households also means the new PM is asking future taxpayers to accept a very large, and very uncertain, bill to help today’s energy bill payers. The Foundation notes that the new PM’s announcement, which the government exceptionally chose not to provide any costings for, could eclipse the £137 billion bailouts for banks during the financial crisis. Support for households alone over the next six months is likely to cost around £57 billion, rising to around £120 billion over the next two years on current forecasts for wholesale gas prices. Business support, many details of which are still to be finalised, will add significantly to this. The Government has rightly rejected calls from industry to fund the package via higher bills, but could have done more to reduce the pressure on tax and bill payers by tackling the windfalls some energy companies are seeing. A proposal to negotiate new longer-term contracts with low carbon energy generators in order to reduce the prices they charge today risks delaying but locking-in those windfalls, rather than removing them. The significant fiscal loosening currently underway will also increase the pressure on the Bank to increase interest rates faster than they otherwise would. The Foundation notes that an extra 1 per cent on interest rates would add around £11 billion in public borrowing in the first year. The Foundation says that as today’s support does not change the medium-term outlook for prices and pay, households are still likely to end the current parliament significantly poorer than they were at the start of it – an unwelcome and unprecedented feat in modern British history. Turning this around will require energy prices to fall and the new PM to succeed in her focus on turning around the UK’s sluggish growth rates. Torsten Bell, Chief Executive of the Resolution Foundation, said: “Soaring gas prices were set to leave millions of families facing a living standards catastrophe this winter, with energy bills on course to hit £550 in January alone. “The new Prime Minister has rightly responded with a mammoth energy support package that will cover around three-quarters of the rise in energy bills this winter. “Households should be reassured that the winter ahead will not be as bad as feared, but policy makers need to recognise it will still be very tough indeed. The Energy Price Guarantee does a good job of targeting those households facing the highest energy bills but, because it is not well targeted at those on low and middle incomes, comes with a large price tag. “Liz Truss is asking future taxpayers to pick up a large and very uncertain bill on behalf of today’s energy bill payers, but declined to set out the cost of this huge package. It could end up surpassing the bank bailouts at the height of the financial crisis, with new support for households alone on course to total around £120 billion. It goes without saying this can’t be the permanent answer to higher energy bills. “Overall this is a huge package of support announced by the new Prime Minister within days of taking office. A decision to borrow very big indeed will significantly soften, but far from end, the immediate squeeze on family finances ahead of us.” Notes to Editors The total cost of supporting households to the end of Q3 2024 is based on the difference between wholesale gas and electricity prices needed to result in a Default Tariff Cap at £2,500 per year, estimated at £2 per therm for NBP gas and £175 per megawatt hour for GB baseload electricity based on Ofgem’s price cap methodology, and current energy futures prices, downloaded from the ICE exchange on September 7 2022. The current average gas wholesale price over this period is £4.64 per therm and electricity averages £425 per megawatt hour. Government figures for domestic gas and electricity consumption are weighted by quarter to reflect higher energy use in winter months. This estimate comes with inherent uncertainty, not only in terms of energy market volatility, but also how households will respond to price signals by reducing demand.