Addressing rising energy bills
Think tank: Institute for Government
Author(s): Olly Bartrum; Thomas Pope; Gemma Tetlow
August 23, 2022
This report from UK think tank the Institute for Government looks at what the government can do to address rising energy bills.
Big increases in energy bills mean that UK households are set to face a very difficult winter. Annualised bills for a typical household are currently £1,971, already 50% higher than in March, but they are expected to increase to £3,600 in October, and even further, to £4,300, from January. The government has already provided some support, but more is likely to be needed. This paper lays out the government’s options. Its key findings are: The government’s support package was generous, but bills are now expected to increase much further. Government support so far, including tax cuts, rebates and specific payments to vulnerable households, will cost £33 billion, which would have been enough to offset almost 90% of the higher bills this financial year on average based on expected bills in May. But bills are now expected to increase much further, and that package is now only enough to offset around 60% of the increase this financial year. The measures committed to by Liz Truss and Rishi Sunak will make only a small dent in the costs now expected this winter. Both candidates to be prime minister have promised to take some action on energy bills, but policies committed to so far (cutting green levies and VAT from Truss and Sunak respectively) would save around £150–£200 per year on average energy bills, only enough to offset around 10–20% of the increase in the forecast for bills this winter that has occurred since May. Extending the Johnson government’s support package to account for higher energy bills would cost £19bn. If the new government wanted to offset almost 90% of bill increases this financial year, retaining the generosity of the May 2022 package, it would need to spend an additional £19bn. It would cost less – just £6–8bn – to do this only for low-income households, pensioners and those with disabilities. Capping energy bills would avoid gaps in support but would be expensive. The Labour Party, among others, have proposed capping prices at the current £1,971 per year for a typical household. This would have the benefit of providing more support to high-energy-use households, who under current government policy get the same cash support as those with lower bills. But this would be expensive – costing just under £40bn for six months. It would also mean that households would face a lower energy price, and so have less of an incentive to save energy. Support is likely to be needed beyond this year. So far support is all focused on winter 2022/23, but current projections are for energy prices to be just as high, if not higher, next year. The new prime minister will need to be ready to provide further support again. Offsetting the same proportion of bills next year would cost nearly another £70bn. Given how long the crisis is expected to last, the government should also look at other measures to deal with the high energy bills, including investing in energy efficiency.