The word “crisis” is often overused. But when it comes to the outlook for energy prices, it is exactly right. By October, the annualised energy price cap for a typical household paying their bills by direct debit will have trebled to more than £3,500 in 18 months.
Fast forward to next April and it’s expected to rise again, to £6,600, before remaining at about £5,900 for the rest of 2023. Next spring a typical family could be paying 500% more than they were before the pandemic, and the UK’s overall annual household energy bill will have risen from around £30bn to more than £180bn in just two years. With the costs of energy permeating the wider economy, headline inflation is expected to exceed levels not seen for more than 40 years.
The response from government so far has ticked all four of the wrong boxes: too little; too late; poorly targeted; and overly complicated. Even after accounting for wage growth and benefit uprating, annual family costs are set to grow £3,100 faster than incomes on average between April 2021 and April 2023. If existing government support were to be extended, the average family will still be facing a black hole of £2,400.
There has been little from the Conservative leadership candidates to change these prospects. Rishi Sunak’s proposals are similar in size and scope to existing measures, and Liz Truss’ plans to cut national insurance would lead to just 15% of the benefits go to the poorest half of the population.
A freeze in the price cap this October is now needed to buy time. But it is a sticking plaster rather than a viable solution beyond a few months. At more than £116bn a year from April 2023, the cost of freezing energy prices in line with the April 2022 cap are similar to the entire running costs of the NHS in England before the pandemic.
Neither tax cuts nor price caps help to address energy security, draughty housing stock or the weakest income safety net among advanced economies globally. A full response to this crisis must seek to address these structural challenges too.
We need three things. First, the existing energy cap system must be scrapped. In its place, the New Economics Foundation is proposing a new system of “free basic energy”. The scheme is simple: every household in the country receives an equal share of energy for free, and everyone pays the same premium price for energy above this level.
Although simple, the effects are highly targeted. Overall, the richest 10% of families, who consume more energy on average, would pay double the amount expected under the April 2023 price cap. This helps to pay for lower bills for everyone else and creates strong incentives to improve energy efficiency where it’s needed most.
The poorest 10% of families would get the majority of their energy use across the year free. They would pay £1,900 on average for the rest, compared with an expected bill of £6,200 in April.
Next, the government should create a new permanent energy element in all means-tested benefits – just as there are already separate elements for housing and children – to help the poorest families cover their remaining energy bill, and paid for by increasing capital gains tax.
Finally, to support all families with the indirect effects of energy on the wider cost of living, government should create a “cost of living allowance” worth £750 for each household in the country from April, funded through a reformed windfall tax on oil and gas. The payment would provide immediate relief now, but it would also create a permanent facility for reaching a wide distribution of families quickly in the event of future crises too.
Combined, the package would more than double the value of support currently being offered by the government, but at well under half the cost of freezing the price cap for 12 months. Disposable incomes would rise for 80% of families on average, and for the poorest 50% it would be enough to fully reverse the squeeze since April 2021.
The current crisis is unprecedented. If things stay as they are, not just millions, but tens of millions of people will be struggling to make ends meet, and not just for the coming months, but for potentially years to come.
If, as with the pandemic, the support from government is only temporary, we will soon find ourselves paying the price of starting over once again. That could be when energy prices rise again next year, or it could be the next economic shock from war, disease or environmental catastrophe. Winter is coming, but we must also think to what’s coming next.