The UK faces an energy bill crisis. What options does it have to tackle it?

The business secretary, Kwasi Kwarteng, is considering how to reduce the impact of rising energy costs on Britain’s households.

Since October the market price for natural gas has jumped from £2.50 a therm to £4.50 before dropping back to £1.70. In recent days it has begun to tick up again and on Wednesday it hit £2.23 a therm. To give a measure of the shock to the economy from rising energy prices, in January 2021 the price was about 50p a therm.

The last price cap increase, in October, pushed bills to an average of £1,277 a year for a dual-fuel bill. The next review is expected to push bills up by 50% to nearer £2,000.

Kwarteng said he wanted to ease the pain on businesses and households, but he is up against a chancellor keen to maintain a tight hold on public finances.

The government has options, but all have political and financial costs.

At a cost of £2bn, Rishi Sunak could cut the 5% VAT rate on household energy. It was a move promised in the Brexit campaign by Boris Johnson among others as a mark of independence from EU VAT rules, and would help about 20m to 23m households. But the cut would offset only £75 to £100 of the expected £700 rise in bills. Labour has supported calls for a cut as a first move to supporting all those affected by the rising cost of living. Johnson has recently distanced himself from making the change, calling it a “blunt instrument”.

A 1.25% rise in national insurance contributions for employees and employers from April, labelled the health and social care levy, will raise £14bn for the exchequer. The leader of the House of Commons, Jacob Rees-Mogg, a low-tax campaigner, told his cabinet colleagues this week it would be bad politics to impose such a large burden on the workforce at a time of rising living costs. But a decision to scrap the reduction would benefit the better off as well as those on lower incomes, making it another blunt instrument.

The regulator Ofgem could limit the rise in the energy price cap when it conducts a six-month review in April. If the government comes forward with a loan scheme for the industry, it would allow energy suppliers to smooth out the recent rise in costs over several years. The suppliers could borrow cheaply from the Treasury over the coming months and then repay loans from bills over subsequent years. It would mean that retail prices do not fall when wholesale prices drop, and would bake in higher energy prices for years to come.

The warm homes discount (WHD) will need an overhaul if it is to come close to filling the expected £700-a-year increase in domestic gas and electricity bills due in April. Currently, households on a low income and in receipt of certain benefits receive £140 off their electricity bill, a sum that has not increased in nine years.

Pensioners in receipt of pension credit automatically receive the money paid directly to their supplier. In December the charity AgeUK said more than 900,000 eligible pensioners were missing out on pension credit payments because they had not applied.

Another group – those on low incomes and in receipt of a small number of benefits mostly open to people with disabilities or a child under five – are also eligible for WHD, but they have to apply for the money and hope their energy supplier is still accepting applications.

Only suppliers with at least 250,000 customers are required to make the payments, and a number of the big firms including EDF, Scottish Power and Utility Warehouse have now closed their schemes for 2021-22. It leaves applicants having to switch suppliers to receive the money.

Last year the government cut universal credit payments by £20 a week, saving the Treasury £6bn. The move took payments back to their pre-pandemic level and was offset by a lower marginal taper rate that allowed 2 million of the 6 million claimants on higher, though still modest, incomes to keep more of their benefits, at a cost of £2bn. A reinstatement of £10 a week would boost the incomes of the lowest paid by £600 a year at a cost of around £3bn to the Treasury.

A windfall tax would aim to recoup some of the estimated £20bn spent by energy retailers on buying oil and gas at higher prices over the last year. But which firms should be targeted when so much oil and gas is sourced from overseas?

If the 40% provided by North Sea gas producers fills the Treasury’s vision, some also play a part in government-backed carbon capture projects, probably triggering a backlash. When prices are volatile, determining the size of tax could also prove difficult.

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