Energy bills: Liz Truss caps gas and electricity prices at £2,500

·Business Reporter, Yahoo Finance UK
·6 min read
Prime Minister Liz Truss speaking in the House of Commons on energy bills
Prime Minister Liz Truss speaking in the House of Commons, London, to set out her energy plan to shield households and businesses from soaring energy bills. Photo: House of Commons/PA via Getty

New prime minister (PM) Liz Truss has announced a limit on UK energy bills, with a cap at £2,500 a year amid soaring prices.

In one of her first acts as PM, the government is expected to borrow at least £100bn to fund the support package, which is a two-year price guarantee starting from 1 October.

Chancellor Kwasi Kwarteng will set out the expected costs of the energy package in a fiscal statement later this month. A move which the Institute for Fiscal Studies (IFS) condemned.

"This is a huge policy intervention which could easily cost over £100bn in the next year alone, with more to come in the following year. Given the scale of the package, the failure to provide any official sense of a costing was extraordinary, and deeply disappointing," IFS director Paul Johnson said.

The energy cap, which limits the price suppliers can charge customers for units of gas, now means a typical household will save an average of £1,000 a year on their energy bills.

This takes account of temporarily removing green levies, worth about £150, from household bills. The guarantee will supercede the existing energy cap.

A £400 payment for all households to help with energy bills will also still go ahead as planned from October.

Energy prices will be capped for the next two years. Source: Ofgem
Energy prices will be capped for the next two years. Source: Ofgem

Households which do not pay directly for mains gas and electricity, such as those living in park homes or on heat networks, will be no worse off and receive support through a fund.

The recent increase in consumers' bills follows steep rises in wholesale gas prices thanks to the Ukraine war, which has reduced supplies of Russian gas. A typical household's annual gas and electricity bill was due to rise from £1,971 to £3,549 in October.

British businesses and public sector organisations will also see equivalent support to that being offered to consumers. There will be a new six-month scheme for UK firms over the winter.

After that six-month period, ministers plan to offer "focused support" to vulnerable industries.

Read more: This is what Liz Truss’s energy bill plan means for you

“Decades of short-term thinking on energy has failed to focus enough on securing supply — with Russia’s war in Ukraine exposing the flaws in our energy security and driving bills higher. I’m ending this once and for all,” Truss told the House of Commons

“I’m acting immediately so people and businesses are supported over the next two years, with a new Energy Price Guarantee, and tackling the root cause of the issues by boosting domestic energy supply.

“Extraordinary challenges call for extraordinary measures, ensuring that the United Kingdom is never in this situation again.”

It comes after stark warnings from experts and charities that have called on the government in recent weeks to help with the sharpest cost of living crisis in a century.

An Ofgem spokesperson said: “Ofgem welcomes this significant and unprecedented support for energy consumers across the country. It’s been clear to Ofgem and the government since we announced the new price cap that the new government would have to act urgently and decisively to support consumers and this package of support will be welcomed by millions across Britain.

“Given the scale of the crisis and the challenges that lie ahead, it is the right time to assess the approach that has been taken. Therefore, we welcome the reviews on regulatory structures and how we get to net zero by 2050. We look forward to working with government on both.”

Watch: How to save money on a low income

Economists have said that Truss's plan to freeze energy bills will help bring down inflation, taking the pressure off the Bank of England (BoE) to raise rates aggressively at its next meeting later this month.

Samuel Tombs at Pantheon Macroeconomics said inflation could claw back from the 40-year high of 10.1% recorded in July to the BoE's 2% target in the second half of 2023 thanks to the freeze on bills and a fall in wholesale prices.

Truss said on Thursday that the announcement would also deliver benefits to the UK economy.

"Boosting growth increases tax receipts and curbing inflation by four to five points, reducing the cost of serving debt," she said.

However, the End Fuel Poverty Coalition pressure group said that an energy price cap freeze at £2,500 will still result in 6.9 million UK households being in fuel poverty this winter. This is up from 4.6 million as the same time last year.

Read more: What a Liz Truss government means for your tax, bills and savings

The prime minister said that a ban on fracking, a technique for recovering gas and oil from shale rock, will be lifted. This will allow developers to seek planning permission where there is local support.

She also ruled out introducing a fresh windfall tax to pay for the new energy package, claiming it would undermine the national interest and hamper efforts to develop homegrown energy production.

Leader of the opposition and head of the Labour party Keir Starmer asked the PM who was going to pay for the announced support. He pointed to the estimated £170bn in unexpected profits for energy companies and called for an expansion of the existing windfall tax.

Frances O’Grady, general secretary at the Trades Union Congress (TUC) said, "The prime minister is making the wrong people pay. She should have imposed a much larger windfall tax on profiteering oil and gas giants. And she should have required all firms getting help with energy bills to commit to no lay-offs for the lifetime of the help, to protect livelihoods.

“And it’s not just energy bills soaring — so she needs to do more to help families get through the winter. That means a real plan to get wages rising, a big boost to universal credit, child benefit and pensions, and a massive rollout of home improvements to cut bills. And it’s time to bring energy retail into public ownership to make sure this crisis never happens again.”

Read more: Why the energy price cap is going up when oil firms are making billions in profit

The TUC said that the government should set out a programme to make UK living standards more resilient and the UK economy more resistant to a future crisis.

Meanwhile, Ben Harrison, director of the Work Foundation at Lancaster University, said: "The £2,500 energy cap will give many working families stability for the next two years so that they can keep the heating on, but there are still big questions about whether this policy will be paid for by the taxes of working people,"

“These measures alone won’t end the cost of living crisis. It is still going to be a very challenging winter for those in low paid, insecure jobs whose wages are not keeping up with rising prices and will still struggle to make ends meet.

"In the longer-term, it is important that the new government ensures that social security is more responsive to the true cost of living as prices rise.”

Watch: How does inflation affect interest rates?