A blank cheque

Key findings

Higher-income households typically use more energy, so the top fifth may gain around £1,300 this winter from the EPG compared to £1,100 for the lowest-income fifth. Income is not the main predictor of energy use, however: more than one in ten households will gain over £2,000 from the EPG, while another 13 per cent will gain less than £500 (reflecting their electricity and gas use).
The total package of support that has been introduced to support household incomes in 2022-23 is broadly equal across the income distribution in cash terms, and worth around £2,200, of which slightly more than half is in the form of the new Guarantee. Plans to provide further cost of living support by scrapping the rise in National Insurance would skew support towards the very highest income households.
The EPG will reduce headline inflation by around four percentage points in January 2023, rising to almost six percentage points for the poorest tenth of households, at the cost of potentially prolonging elevated inflation or higher interest rates.
A form of price capping will be extended to business and other energy users for an initial six-month period, with further support provided to ‘vulnerable’ sectors. The approach needs to reflect that some firms will have energy bills that have not risen significantly: just 32 per cent of businesses (with 10 or more employees) are on a variable electricity contract, and 53 per cent have a fixed contract until at least March 2023 (the equivalent figures for gas are 35 and 51 per cent).
Based on current wholesale gas futures prices, support for households alone over the next six months would cost around £57 billion, rising to around £120 billion over the next two years. Business support, many details of which are still to be finalised, will add tens of billions to this.
This package will increase the pressure on the Bank of England to increase interest rates faster than they otherwise would. An extra 1 per cent on interest rates would add around £11 billion in public borrowing in the first year.
There is very little chance that measures announced by the Government – new North Sea oil and gas licences, lifting the moratorium on fracking, continued focus on new offshore wind and nuclear capacity – will have any impact on bills by the time the EPG expires.
The Government set a goal of the UK becoming a net energy exporter by 2040. The UK currently imports 38 per cent of its energy, and has not been an energy exporter for nearly 20 years.

Recommendations

Less than £1 in every £12 spent on energy support for households will be recouped directly through the Government’s existing windfall tax, and there is a strong case for extending that tax on hydrocarbon producers, and imposing such a tax on low-carbon electricity generators who are not exposed to the high price of fossil fuels. There is also a strong case for further reducing the pressure on borrowing by considering a solidarity tax of some form.
The issue of high energy bills in poorly insulated homes is especially acute in the winter months, yet the sole support for households to insulate their homes is the Energy Company Obligation scheme, currently only funded to the tune of £1 billion per year. The Government has also overlooked the new sources of energy that can be built quickest, specifically onshore wind and solar. Revisiting this decision would be a clear step toward lowering the cost of nationwide support with energy bills.
The Government should go ahead with the uprating of benefits in April 2023 in line with September 2022’s inflation rate, and also consider the infrastructure that would be required to put in place a new social tariff for energy.

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