The exact details of the policy have yet to be announced, but there are estimates that it could cost up to £130bn over the next 18 months. In fact, predicting the cost is difficult as it depends on the volatile price of natural gas. Natural gas wholesale price chart
What has been suggested?
Freezing the bills that consumers will cover this winter and maybe next year as well. A squeeze on natural gas supplies exacerbated by Russia’s invasion of Ukraine means there is little sign that prices are likely to ease soon, forcing the government to act. This policy would see ministers bypass the energy regulator, Ofgem, and effectively set the price households pay. National Energy Action estimates that keeping the cap at its current level would prevent 4.4 million entering fuel poverty from October.
How would freezing work?
The government will guarantee funding to energy suppliers to cover the difference between the cap and what they would have charged. Under one plan, pioneered by ScottishPower, commercial banks would put money into a state-backed fund. Another option would be a fund held directly by the Treasury. Retail suppliers could then draw on this fund to freeze customer accounts. The debt incurred by suppliers will be repaid by consumers, either through bill mark-ups or wider taxation over a period of 10 to 15 years. It is understandable that the Ministry of Finance likes the choice of the commercial bank because it removes the debts from its balance sheet. For companies, the plan would essentially mean swapping riskier customer debt from people who can’t pay their bills for more secured government-backed debt. But RBC Capital analyst John Musk warns: “There are limitations with the policy as it will not incentivize energy efficiency and the proposed £130bn price tag is highly dependent on future commodity prices, as is the pace whereby The debt will be recovered gradually if and when energy costs are reduced.’ There is also a question about how to handle people with prepaid meters whose price cap is higher than £1,971. “There’s an ethical question about whether they should really pay more if you freeze prices for everyone else. [The government] can look at that group and decide they should pay the same level,” says Martin Young, senior analyst at Investec. Chart of peak energy prices including forecasts for Q4 2022 and 2023
How would it be paid?
There are three ways Truss could fund her plans: other tax increases elsewhere, spending cuts or more public borrowing. The latter would add to a budget deficit – the gap between government spending and revenue – already expected to be high this year due to a mix of factors: growth weakened by Brexit and Covid, growing pressure on public services and increased interest payments on public debt amid high inflation. Earlier this year, the Office for Budget Responsibility predicted that borrowing this year would total around £99bn, giving the government around £30bn of capital headroom within the financial limits set by Rishi Sunak. Most commentators expect that these rules will have to be lifted, at least temporarily, to address the worsening energy crisis. Despite this, Britain’s total debt pile of more than £2tn has steadily grown from successive annual deficits, leaving it close to 100% of GDP. The prospect of further additions to this has raised concern in financial markets about the government’s ability to manage public finances in a sustainable manner. Critics of Truss’s plan, including Sunak, have warned that markets losing confidence could worsen the situation by raising the government’s borrowing costs. Putting more money in consumers’ pockets could also fuel higher inflation, forcing the Bank of England to raise interest rates more than expected – creating a different kind of financial headache. But economists say freezing energy prices could help stop the pace of consumer price inflation peaking higher. This would help limit the rise in borrowing costs on the government’s debt linked to inflation. Consultancy Capital Economics said inflation may now peak near 11%, up from 10.1%, rather than much higher, calling the Truss package “an effective but expensive sticking plaster”.
What about businesses?
Businesses are not subject to the price cap and face huge bill rises from next month. Truss is reportedly ready to approve a plan for a £40bn package to support them. The cost is cheaper than consumer estimates because businesses that use large amounts of energy can usually negotiate lower energy prices. There are two options to implement this – either setting a guaranteed unit price that businesses will pay, or a percentage reduction or reduction in the unit price that all energy suppliers must offer to businesses, Bloomberg reported. The government will then compensate suppliers for their losses and review the price of energy charged to businesses quarterly. It is hoped the policy could be implemented in October, when many long-term energy deals for businesses expire.
Are there also industrial measures?
The government is also considering proposals to encourage low-carbon electricity producers to switch from older renewable energy certificate obligation contracts to contracts for difference. This could allow companies to reduce wholesale electricity costs in the short term and thus bills in exchange for more predictable long-term income. Regulators are considering options to reduce the relationship between the wholesale price of natural gas and electricity, although that is unlikely to be implemented to help this winter.
