Money

How will the energy bill freeze work, and how will it affect me?

An energy bill freeze will be introduced to help people with the spiralling cost of living. Here's what we know about the scheme so far.

Liz Truss holds a phone to her ear while setting alone at a dark wood table

Prime Minister Liz Truss on her first day in Downing Street where getting control of energy bills is high on the agenda. Picture by Andrew Parsons / No 10 Downing Street

New prime minister Liz Truss has announced a freeze on energy bills, meaning average household energy costs will stay at £2,500 a month from October until 2024 when the price cap was due to rise sharply. 

Businesses will receive an “equivalent guarantee” for six months, Truss said, after which vulnerable sectors such as hospitality could get an extension, although the amount is unspecified.

The move is Truss’s first major policy in her role and is one of the issues likely to define her position as the cost of living crisis, characterised by rising prices and stagnant wages, threatens to push millions of families into destitution.

Though details on the freeze are still emerging, here’s all we know so far about how the freeze will work, how it’ll be paid for and what it means for you.

What is an energy bill freeze?

A “freeze” on bills simply means that energy costs will be maintained at a particular level. Truss announced that the average household energy bill for a year would be capped at £2,500 in October and remain there, with any excess paid for by the government.

This is lower than the £3,549 a year cap which energy regulator Ofgem said would be introduced from October but is still a 25 per cent increase on where they currently stand and double what they were at the end of 2021.

Average energy bills rose to £1,971 a year in April, a 54 per cent increase on the previous cap of £1,277 set in October 2021.

Businesses are not protected by a price cap but reports suggest that Truss is drawing up additional support to help keep their energy costs down.

This could involve making energy firms reduce the unit price of the energy that businesses use.

Will this affect the energy bill rebate?

Every household is still set to receive a £400 discount on energy bills in the coming months, as was pledged by former Chancellor Rishi Sunak.

This should be paid to you automatically and you won’t have to apply.

How much will an energy bill freeze cost – and how will it be paid for? 

Estimates suggest that freezing bills could cost the government somewhere between £130bn and £150bn.

There are no numbers attached to the freeze for businesses but Truss also announced a £40bn scheme to support energy firms with “price volatility”.

She ruled out another windfall tax on the bumper £170bn profits made by energy companies but did not give any other information about how the policy will be paid for, hinting only that the fiscal review from new Chancellor Kwasi Kwarteng will expand “later in the month”.

So there are a few different options for covering the cost of the scheme, with government borrowing the most likely contender.

Alternatively, the government could offer energy companies even more money, in the form of state-backed loans, to cover the costs of the energy freeze.

Either way, the costs will have to be repaid somehow, and there is some debate over how this should work.

One option for recovering the cost of government borrowing is funding the scheme via general taxation.

Sam Alvis, head of economy at think tank Green Alliance, says that funding through general taxation would actually be the fairest option given “it distributes costs evenly across the income scale”.

“People earning the most money will pay the most money to reduce the cost of borrowing,” he said.

Alvis added, however, that the costs shouldn’t fall solely on the shoulders of ordinary people.

He suggests that the government should “raise the level of windfall tax” on energy suppliers and producers to raise money for the cost of the scheme. 

He said that cancelling the current investment allowance – a tax break for energy firms – could also help raise funds. 

Another option for recovering the cost of loans of energy companies would be to raise the cost of people’s energy bills over the coming 10 or 20 years. 

Mike Childs, head of policy at Friends of the Earth, said that this policy would be “regressive” because “lower income households would pay back more as a proportion of their income than wealthier households”. 

George Dibb, head of think thank IPPR’s Centre for Economic Justice, echoed this sentiment, adding that such a move would be unfair given “energy companies are forecast to make windfall profits of £170bn over the next two years”. 

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What about fixing the problem long-term?

Almost every environmental group is in agreement that a freeze on energy bills is not the long-term solution to the energy crisis, which is being driven by the UK’s dependence on oil and gas.

Truss’s speech was big on securing the UK’s supply of energy, with promises to increase drilling for oil and gas in the North Sea, remove the ban on fracking, expand nuclear energy capacity, review energy regulation, and devise a plan to make the country net-zero emissions by 2050 in a manner which is “pro-business”.

Truss has not hinted that she will implement measures to constrain demand for energy, which many environmentalists have been calling for. 

Alvis of Green Alliance said that the focus on increasing supply rather than reducing demand may be down to a “nervousness in government post-Covid to be seen to be interfering with people’s lives”.

Constraining demand could help avoid blackouts as well as keeping people’s bills low and reducing the environmental impact of energy generation.

Childs, of Friends of the Earth, said that measures like insulating homes and investment in renewable energy will be crucial in solving the energy crisis in the long-term. 

“While emergency cash – or a freeze on energy prices – is badly needed by millions of households before winter, it’s still only a short-term solution,” said Childs.

“We can’t rely on the government to bail out households year on year, it’s both costly and unsustainable. By addressing the root causes of soaring energy prices we can bring down sky-high bills for good. 

“That means insulating our heat-leaking homes, which are the least energy efficient in Europe. And fixing our broken energy system by ending our reliance on expensive and volatile fossil fuels, harnessing the UK’s abundant renewable power potential instead,” he said.

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