Price cap rise adds £14bn to cost of maintaining household support

The increase in the energy price caps announced by Ofgem will add £490 for a typical household’s energy bill over the period October to December relative to what would have happened if prices were unchanged, according to the Institute for Fiscal Studies (IFS).

In May the government put forward a support package to tackle the rising cost of living. At the time, this support package represented around three quarters of the rise in energy costs expected over the year. But with the energy price caps for the coming six months much higher than expected, it will now only cover 47% of the rise in bills. Covering the same proportion of the increase in bills as intended back in May would now cost a further £14 billion on top of the support that has already been given.

Both candidates for Prime Minister have promised further support for household energy bills. Rishi Sunak has promised further direct support to households of around £5bn and to remove the 5% VAT charge on household energy bills for 12 months from October. Liz Truss has not ruled additional direct support out, but says ‘her priority’ will be tax cuts, specifically a ‘one-year temporary moratorium on the Green Energy Levy’. While Truss has committed to cut other taxes, these are highly unlikely to be in place for October.

The announcement by Ofgem increases the generosity (and cost) of Sunak’s plans to cut VAT, which would save the typical household a total of £51 over the 3-month period spanning 1 October and 31 December in which the new price cap applies, at a cost of £1.4bn in forgone revenue over this period.

Truss’ plans to cut taxes are harder to assess as there is no single tax called the Green Energy Levy. The levies that normally add around £150 to household bills will raise costs by much less this year as renewable subsidies fall – and indeed are paid back – when electricity prices are high. In the three months from October the net total effect of these levies on bills is likely to be just £11, and it is likely to remain low next year too. Cutting only those levies that still add to bills would be complex as they are linked to various schemes and subsidies and apply to business as well as households, but would save households around £50 on average over the three months from October.

Isaac Delestre, research economist at the IFS, said: ‘The new energy price cap means that typical bills for this financial year will be 27% higher than what had been expected when the last support package was announced in May. Mr Sunak has proposed additional spending, and tax cuts, that would cover a substantial portion of the increase in energy costs for the coming winter. Ms Truss has proposed a suspension of green levies that would have only a modest effect on household bills, but has so far been less clear on the scale of and nature of direct support she would provide.

‘Looking beyond this winter, energy prices also look like they will remain very high well into next year, which will put pressure on the government to provide further support in the coming months. Whoever becomes the next Prime Minister will most likely be announcing a substantial package of support very soon after taking office.’

Photo by Nick Pampoukidis