The price cap is to be set at £2,500 for two years from October onwards, Prime Minister Liz Truss has announced as part of a range of measures designed to address the energy crisis.
“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,” Prime Minister Liz Truss said as she addressed the House of Commons for the first time in her new role.
“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.”
The Energy Price Guarantee supersedes the price cap which was set at £3,549 for the three months from October. This was an increase of 80% from the level of the Default Tariff Price Cap over the summer.
Due to this dramatic increase, the number of UK households in fuel poverty was predicted to increase from 4.5 million last October to 8.9 million this October.
The Energy Price Guarantee will be brought in along with the existing £400 support package, which will be delivered to households by their suppliers over six months from October. It will save the average household £1000 over the course of a year, Truss stated.
It will also include green levies being temporarily removed from household bills, which will save £150 according to the government.
In addition to the Energy Price Guarantee, businesses will see their energy costs set at the same price per kWh as households are set to pay under the new plan. This cap will be set for six months, but will be reviewed after three.
The government will also introduce a new six-month scheme to support businesses who are seeing their energy bills surge. This follows calls for “urgent action” from a host of parties as businesses reported projected increases in energy costs of more than 500% as they are not protected by the price cap.
Following on from the six-month scheme, the government will establish more targeted support for certain industries.
Gareth Miller, CEO at Cornwall Insight said delivering the price guarantee for businesses would be “complex”.
“The approach will invite pressure on where lines are drawn as we move from general support to sector-based approaches. The challenge is also financially steeper in business than households,” he explained.
“UK businesses contribute a large share of demand, and face significant hikes in their energy bills. There are a variety of tariffs and different types of price fixes and hedging in play as well. Implementation of support here without creating accidental winners and losers across companies, sectors and suppliers is doable but challenging. To prevent widespread business distress, particularly during the first 6 months of cross-economy support, the injection of money required could be much higher than currently assumed.
“The two commodities in shorter supply than gas right now, from businesses struggling with energy bills, are time and cash. Neither will wait for long periods of policy development and implementation to conclude, with businesses already making hard decisions to close or release workers,”
Truss confirmed that the new support measures will not be funded through a windfall tax – unlike the pervious support package which is being funded through the Energy Profits Levy, a 25% windfall tax on oil and gas companies.
She argued such a tax would discourage investment in the UK’s energy sector, ultimately harming energy security.
The opposition Labour Party has been particularly pushing for a windfall tax to fund additional support. When he took the floor following Truss’s speech, Labour leader Kier Starmer highlighted that the oil and gas companies are set to make £170 billion in unexpected windfall profits over the next two years.
The government will provide suppliers with the difference between the new lower price cap, and what energy retailers would charge their customers if it were not in place.
Schemes that have previously been funded by green levies will also continue to be funded by the government over the next two years to “ensure the UK’s investment in home-grown, secure renewable technologies continues,” the government said.
How the new plan will be paid for will be announced by the Chancellor Kwasi Kwarteng later this month.
The action is expected to reduce inflation by 5%, reducing the cost of servicing the national debt according to the government.
Long-term energy security: fracking, offshore licenses and nuclear
Beyond short-term measures, Truss stated she’s also looking to boost energy security in the long run through a number of actions. Most controversially, she is lifting the moratorium of fracking in the UK, allowing it to be developed “where there is local support for it”.
“All the experts and even the industry agree more UK gas won’t bring down British bills. To bring down bills we need to use less gas by investing in insulating homes, a measure which could be cost neutral to the Treasury given it will spend billions on the price cap freeze,” said Jess Ralston, senior analyst with the Energy and Climate Intelligence Unit.
“There is a real danger of the Government serving up a red herring with local communities likely to oppose fracking rigs while focus is diverted from efficiency and renewables which can be quick to introduce and are popular, rather than unpopular, with the public.”
Beyond fracking, over 100 new North Sea oil and gas licenses will be launched as early as next week.
The government will work to drive forward the acceleration of new sources of energy supply including nuclear, wind and solar. This includes continuing to progress up to 24W of nuclear by 2050, a target set out in the British Energy Security Strategy earlier this year.
Increased generation from both will for a key part of the new target announced by Truss, with the UK now working to become a net exporter of energy by 2040.
A new Energy Supply Taskforce, which will negotiate with both domestic and international suppliers to agree to long term contacts designed to reduce the price of energy and increase the security of supply. This will be led by Madelaine McTernan, and will work together with the Department of Business, Energy and Industrial Strategy.
Fundamental reforms will be taken to the structure and regulation of the energy market, with Truss announcing that “the regulatory market has failed”. This will be on the basis of recommendations made from a new review of the UK Energy Regulation.
A second review will also be launched, which will look at how to meet net zero by 2050 in an “economically-efficient way, given the alternated economic landscape.” This will be chaired by Chris Skidmore MP, and will report by the end of the year helping to ensure the target is met without “placing undue burdens on businesses or consumers.”
“The global headwinds caused by Russia’s war in Ukraine, Putin’s weaponisation of energy and the aftermath of Covid, have exposed the need to strengthen Britain’s energy security for the good of the nation and the millions of households and businesses who will struggle to meet the cost of bills this winter,” Business and Energy secretary Jacob Rees-Mogg said.
“The action we are taking today will reduce that worrying burden in the short term and will invigorate the long term reforms we need to complete, to resolve the underlying problems in the energy market and ensure the British people enjoy affordable and plentiful energy in future.”