Energy crisis: what can government do to reduce soaring gas and electricity bills?

Energy industry bosses are set to attend emergency talks with government on Monday to discuss emergency measures aimed at dealing with an unprecedented rise in gas and electricity bills.

Suppliers are calling on the business secretary, Kwasi Kwarteng, to agree a package of help including tax cuts and direct financial intervention by the government to stop customers being hit with unaffordable rises.

Households have so far been partially protected from huge increases in the cost of wholesale gas by the energy price cap which prevent suppliers from immediately passing on costs.

How much are energy bills expected to rise?

From 1 April, households that are currently on a standard variable tariff will see their bills rise sharply when the new energy price cap level comes into force.

That level will be announced in February and is calculated by Ofgem using a formula based on market prices and expected costs for suppliers.

Experts forecast that it will jump from £1,277 per year for the average household to around £2,000 – an increase of more than 50 per cent. For around 4 million customers on prepayment metres the price is likely to be slightly higher still.

What if I’m not on a standard variable tariff?

People who shop around and switch deals away from standard variable tariffs were able to find deals for hundreds of pounds cheaper than the energy price cap. Those deals have now all been withdrawn as the cost of supplying energy has gone up.

When fixed-term deals expire, customers will be moved to a standard variable tariff at the price cap level. The option to shop around is still available but other deals will be more expensive so customers are advised not to switch.

What measures are being proposed?

VAT cut

Energy UK, the trade body for suppliers, is calling for VAT to be cut on household bills from 5 per cent to zero.

Businesses pay 20 per cent VAT on their energy bills and the government offers a 5 per cent rate for firms that use a limited amount electricity. Businesses are not protected by the energy price cap.

In October’s Budget, Rishi Sunak resisted calls to cut VAT on energy. Whitehall sources said at the time that the cut would be poorly targeted, helping out people who could afford to pay as well as those who will struggle.

Green levies

Suppliers want levies which fund renewables investment and energy efficiency improvements to be removed from bills. The investment would instead be paid for from general taxation.

They argue that this would be more progressive because those on higher incomes would contribute proportionally more. By contrast, the levy is a tax on an essential good which takes up significant part of low-income households’ budgets.

E.On’s chief executive Michael Lewis has called for a “polluter pays” approach which would include an increased tax on carbon to make up for the money lost from levies on bills.

Suppliers estimate that scrapping green levies and cutting VAT to zero could reduce bills by £250 to £30,0 on average.

Spreading costs

Energy UK has suggested an industry-wide financing scheme to allow suppliers to spread the cost of gas price spikes supplier failures over several years.

Currently, the price cap mechanism means that these costs will all hit people’s bills next year.

Under the plan, lenders would provide funds to cover the immediate up-front costs of buying energy, with the money recouped over a longer period. The government would not guarantee the loans but would oversee the scheme to ensure it is not abused.

Government funding

E.On has said that a “more radical” approach may be needed. It proposes government stepping in to use public funds to lower bills in the short-term.

“As an example, that could mean the government taking some or all of the cost rises onto its balance sheet, allowing these sudden price spikes to be paid back later and reducing the immediate burden on consumers,” said E.On chief executive Michael Lewis.

This is likely to be a tougher sell to government, with ministers indicating they do not want the state to be more involved than is necessary.

Dan Alchin, deputy director of retail at Energy UK, points out that other countries’ governments have provided direct support. For example, in Ireland households have promised €100 off their first energy bill in 2022 and in Italy the government has provided loan facilities to suppliers.

“Right now, nothing should be off the table. We need the UK government to engage with industry and finding a way through this that helps customers,” Alchin said. “They have not responded as quickly as Treasuries in other countries.”

Why are energy bills going up so much?

Gas imports to Europe have been lower due to the global economic recovery which has caused increased demand in Asia. Protracted cold spells over last winter and into spring, have led to lower-than-normal amounts of gas left in storage across Europe.

The UK imports around half of its gas and is more reliant on the commodity to heat homes than many European countries which predominantly use electric heating systems.

Continued low imports and the need to re-fill gas storage sites for next winter has driven gas demand and caused forward gas prices to rise further.

Russia has also been accused of limiting its supplies of gas into Europe to exert political pressure on EU governments. The Kremlin wants governments to approve the opening Nord Stream 2, a gas pipeline from Russia into Europe.

Wholesale electricity prices have also been pushed up by higher gas prices and an increase in prices for carbon allowances.

Consumers will also have to cover the costs stemming from failed suppliers, some of which failed to hedge their exposure to volatile gas prices by buying enough energy in advance.

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