Rishi Sunak, chancellor, has announced a £9bn package to help struggling British households cope with a surge in domestic energy bills, as the price cap rose to almost £2,000 a year.
Domestic energy bills in Britain will jump to their highest level in more than a decade after regulator Ofgem said the upper limit for electricity and gas prices paid by about 22mn households would rise 54 per cent, or £693, to an average of £1,971 a year from April.
The chancellor’s announcement came just 30 minutes before the Bank of England increased interest rates from 0.25 per cent to 0.5 per cent, warning that inflation could hit 7.25 per cent in April.
The government is grappling with how to deal with a cost of living crisis that will only worsen with the jump in energy bills along with impending tax rises. Sunak said his package of support would “take the sting out of a significant price shock” when the new cap takes effect in April.
The support package contained two main elements. The first is a £3.6bn council tax rebate, paid in April, worth £150 for each property in England in bands A to D.
Sunak said 80 per cent of households would benefit and the sum was not repayable. Extra cash would be made available to the UK’s devolved governments to offer similar schemes.
The second element will cost £5.5bn and cut £200 off electricity bills in Britain, but not until October when analysts are forecasting a second increase to the energy cap. Sunak aims to recoup that money by adding £40 to electricity bills annually for five years from 2023.
Britain’s energy price cap is currently adjusted twice a year, in April and October, and based on forward energy prices in the wholesale market analysts expect the October level to exceed £2,400 a year.
Energy consultancy Cornwall Insight is predicting that even in April 2023 the cap will need to be at £1,846 per household per year based on average usage.
Martin Young, energy analyst at Investec, said the £200 universal payment would likely be absorbed by the expected rise in October. “Indeed, a repayable £200 rebate on electricity bills is arguably a political conjuring trick,” he said.
The chancellor said he had deliberately chosen to help “people on middle incomes who are struggling” as well as people on benefits.
Rachel Reeves, Labour shadow chancellor, said the help would be wiped out by the tax rises that Sunak was introducing in April. “The Conservatives are the cost of living crisis,” she said.
A £12bn national insurance rise — which many Tory MPs wanted to axe — and the freezing of income tax thresholds will jointly cost a typical household £600 a year from April, according to the Resolution Foundation.
Some 4.5mn largely vulnerable households that use pre-payment meters for their electricity and gas will see their bills rise by an average of £708 to £2,017 a year. Prepayment meter customers pay more than those households that settle their bills via direct debit. Ofgem said the higher cap also reflected the cost for energy companies to serve them.
The new level, which comes into force on April 1 and lasts for six months, is the highest since the price cap was introduced in 2019. It also the highest level for an average bill since 2009, according to official data.
The sharp rise has been driven by wholesale gas prices, which broke a series of records last year and continue to trade at historically elevated levels. Energy companies and analysts have warned that as a result, bills will remain high well into next year and potentially beyond unless there is a rapid decline in commodity prices.
Charities warned the government’s intervention would be insufficient to prevent millions more households plunging into fuel poverty. Even before the energy price crisis, an estimated 4mn households could not afford their electricity and gas bills.
Caroline Abrahams, charity director at Age UK, said she was “bitterly disappointed” by what she had heard from the chancellor as his plan to soften the blow of the bill increase “simply does not go far enough”.
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