Prime Minister Liz Truss is set to announce a freeze to the energy price cap on Thursday, as she attempts to tackle the UK’s cost of living crisis.
Ms Truss will borrow as much as £100bn to support the plan, despite warnings that it could drive up tax rates and cause winter blackouts.
The energy price cap was set to soar to £3,549 a year in October – an increase of 80 per cent.
Energy bills have skyrocketed in 2022. In April the price cap jumped by almost 60 per cent, from £1,227 to £1,971. The latest increase meant annual energy bills would have almost tripled in the space of just six months.
But now Ms Truss will announce the price cap will go no higher than £2,500. Here is everything you need to know.
What is the energy price cap?
The price cap limits the amount that a supplier can charge for their default tariff. It was launched in January 2019 by energy regulator Ofgem with the intention of keeping down the cost for households across the UK.
It includes the standing charge (a fixed daily amount you have to pay for energy, regardless of how much energy you use) and the price for each unit of electricity and gas.
To show what this might look like for an average person, Ofgem uses a figure of 12,000kWh for a household’s annual energy use.
However, this is just a guide to see what the change in price cap does to a typical household’s annual energy bill. Each household will be different as everyone will use a different amount of energy.
Several factors affect how much suppliers will charge you for energy under the price cap. These include where you live, how you pay for your energy, as well as the type of energy meter you have in your home.
It is currently reviewed twice a year to reflect the costs to suppliers of supplying electricity and gas but this will change to every three months as of October.
How is the price cap calculated?
Ofgem bases the price cap on how much it would cost a typical energy supplier to provide energy for an average home.
It uses several factors affecting energy bills in its calculations, as well as considering usage levels and market data across a given period.
Key factors include wholesale gas and electricity costs for suppliers, the network costs they have to pay – such as infrastructure – and the operating costs and profit margin of suppliers.
Environmental obligations and taxes can also be considered as part of the price cap figures.
How will a price cap freeze work?
On Thursday in the House of Commons the Prime Minister will announce that the price cap will go no higher than £2,500.
She has rejected Labour’s calls for an expanded windfall tax on oil and gas producers and will instead fund the entire package through general taxation, which will cause a short-term surge in Government borrowing.
Ms Truss said: “Putin’s war in Ukraine and weaponisation of gas supply in Europe is causing global prices to rise – and this has only made clearer that we must boost our long-term energy security and supply. We will take action immediately to help people and businesses with bills, but also take decisive action to tackle the root cause of these problems, so that we are not in this position again.”
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However, former chancellor Philip Hammond has cast doubt on the Prime Minister’s promise not to raise taxes, telling i: “If the Government contributes anything, the taxpayer will have to pay. I’m sure that there will be an element of taxpayer funding in this. The key thing is to make sure that that element is sensible and sustainable.
“It may be funded through borrowing in which case the tax rise, the payback, may be deferred into the future. There’s a problem and the Government has rightly said that it will help people during the immediate energy crisis. But we should not mistake that commitment for a statement that the Government can protect people for ever from changes in the underlying price of energy.”
Government insiders insist it is unnecessary to announce ring-fenced funding for the financial support package because it is a one-off intervention that will not add to the deficit in the long run.
A source compared it to pandemic-era interventions such as furlough, saying: “Why is it an issue now when it wasn’t during Covid?”
Paul Johnson, director of the Institute of Fiscal Studies (IFS), described the measure as “very poorly targeted” and one that was unlikely to make a difference to the people struggling to make ends meet.
He told BBC Radio 4’s Today programme: “If this is a straightforward bill freeze, then the majority of the money will go to better-off people who use more energy.
“So this is very poorly targeted. Not only is it poorly targeted, but it also means that we don’t see the full price signal, that across the world people need to see.
“The reason that gas prices are so high is because there’s less gas around. Finding a way of targeting it to the many millions that really need it, without giving it to the many millions who don’t, appears to be something that has stumped the treasury and the Government for finding a mechanism of achieving that.”
Why are energy prices so high?
Energy prices soared throughout 2021 due to a combination of factors. It is an international issue rather than something solely affecting the UK.
Last year, countries in Asia and Europe used significant amounts of gas stocks during a long winter, and the increased demand helped drive up prices, while the reopening of economies following the Covid-19 pandemic also led to higher energy usage.
More recently, the conflict in Ukraine has led to the cost of Russian gas soaring even further, which has in turn pushed bills higher.
In the UK, very little gas is sourced from Russia, but this has not shielded suppliers from the pricing impact across the rest of Europe, which typically purchased around 40 per cent of natural gas from Russia.
Due to sanctions placed on Russia, Europe is buying less gas from Russia, but cutting out the Russian supply has pushed up the price of gas from other sources.
Due to current market conditions, energy prices are continually being increased with the cap expected to rise even further next year.
