Assuming she becomes prime minister next week, Liz Truss and her potential chancellor, Kwasi Kwarteng, will look at options to deal with the cost of living crisis, particularly for those paying high energy bills. Here we consider their possible moves.
Aid aimed at the most vulnerable
While people on relatively high incomes could struggle to pay their energy bills this winter, Truss has made it clear that any support payments will go towards helping the most vulnerable. Many of these people are already energy poor and struggling, and the price cap will increase by 80% in October. Truss has erred against universal ‘handouts’ and could focus on helping pensioners and those on universal credit by extending the £650 given to the lowest 8m households and paying £300 to a similar number of pensioners.
The fuel rebate increases from £400 to £800
A quick way to help most people would be to double the discount on household fuel bills. From October, £400 will be paid in six installments to around 29 million households. Officials have been looking to increase it, potentially to double the amount, because forecasts of price increases are considerably higher than when the initial support was established. This discount is easier to administer, but a forceful instrument, since the wealthiest households will benefit from the bonus.
Tax reductions
A menu of tax cuts is Truss’ preferred route. He has already pledged to reverse the controversial rise in National Insurance contributions, but could make this only apply to workers and leave the increase to businesses. The planned increase in corporate tax, from 19% to 25%, from 2023, could also be reduced. Truss has also looked at plans to reduce VAT across the board, either by cutting it from 20% to 15% or down to 10%. Failing this more drastic move, it could still remove VAT from energy bills, which is expected to save the average household £160.
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New extraordinary tax to freeze the price cap
Truss has ruled out another tax windfall, but Treasury experts believe that with energy companies set to make profits of more than £170bn over the next two years, the move is inevitable. Kwarteng is said to believe it might be necessary. It could choose to extend the energy profits tax, introduced for North Sea oil and gas operators, to renewable energy companies. The tax is popular with Tory voters and could give the government leeway to help with bills, possibly adopting Labour’s plan to freeze the energy price cap at its current level of just under £2,000 a per year rather than allowing it to rise in line with global wholesale gas prices.
Shortfall fund for suppliers to cover fuel price increase
An idea suggested by energy company bosses that suggests the government create a deficit fund to cover the difference between what people pay and what it costs to supply their homes with gas and electricity. The fund could be underwritten by the government or a financial institution and paid by consumers over a period of 10 to 15 years to smooth out costs. Suppliers are expected to take advantage of the time the plan is in place to focus on investing in green energy. While this would spread the energy bills, easing some of the pain now, it would still increase costs for the future.
Decoupling electricity from gas
Truss could follow the lead of the European Commission, which has promised measures to curb rising wholesale electricity prices. Brussels is investigating reforming the marginal pricing system in which the most expensive power station called upon to meet demand on a given day sets the wholesale price of electricity for all suppliers. This means that gas-fired power stations, which are still needed to keep the lights on in many countries, tend to dictate the wholesale price of electricity for the rest of the market, even though renewable energy can be produced cheaper. The UK government has already launched a consultation on the decoupling of gas and renewable energy prices.
Usage-related reductions
The chief executive of the UK’s third largest energy supplier, Ovo Energy, has called on the government to introduce a “progressive” scheme to tackle bills. This would involve reducing the price of energy, but only for a limited amount of use per household, meaning that energy consumption beyond this level would be charged at a higher price. This would aim to prioritize support for poorer customers, as households with higher incomes tend to use more energy, according to Stephen Fitzpatrick, the founder of Ovo, which serves 4.5 million customers.