Energy price crisis: Would an ‘energy furlough scheme’ help homes and businesses?

Pressure is mounting on all policymakers for further interventions in record dual-fuel bills

Lib Dem Party leader Ed Davey has stated this week that the Government is failing to prepare for a “catastrophe” this winter, with Ofgem’s dual-fuel energy price cap for homes set to rise for the second time in a year, potentially past the £4,000 mark.

Calling for a “wartime mentality” in response to the price crisis, largely caused by skyrocketing wholesale gas prices, Davey proposed a string of interventions and urged the Government to announce new changes before a new Conservative Party leader is elected in September. Chief among the recommended interventions is an energy “furlough” scheme, whereby the increase in bills this winter would be absorbed by the Government. The Party has forecast the cost of this scheme as £36bn for a 12-month period.

The Government could find money for the scheme, the Lib Dems are arguing, from additional VAT revenues resulting from inflation. The Bank of England is projecting that inflation will surpass 13% by October. The Treasury could also look to extend its £5bn windfall tax scheme on the energy sector. At present, the tax only applies to oil and gas extraction, and the Conservative Party has previously stated that it will not be extended to power generation before September.

Also floated is engagement between the Government and Ofgem to keep price cap increases to a minimum. The price cap rose by 54% to £1,971 in February. A further rise is in the calendar for October. Ofgem originally estimated that the October rise would be to around £2,800, but has since said it will be higher. Cornwall Insight stated this week that an increase to up to £4,200 is possible.

What are Sunak and Truss planning?

The Conservative Party had, for weeks, stated that it had no intention of holding an emergency budget or announcing further interventions that would address energy bills until the leadership contest is concluded. Party members are able to vote for either Rishi Sunak or Liz Truss to replace Boris Johnson and the new leader will be publicly announced on 5 September.

There may yet be some intervention, with Ministers set to meet leaders from the energy sector today (10 August) to discuss how they are benefitting from sky-high bills.

With climate and energy having barely been mentioned in the early stages of the leadership race, Truss and Sunak have now been pressed to flesh out more detailed opinions and plans on short-term energy interventions and their plans for the energy transition in the longer term.

In the short-term, Sunak has promised to cut VAT on energy bills and stated that he would not be opposed to increasing one-off payments set to be made to homes.  The Government confirmed in May that all UK homes will be eligible to £400 worth of grants towards energy bills this year, with vulnerable groups set to receive additional funding. It had initially pledged £200 in loans to all homes but made an increase.

Truss has taken a slightly different stance and repeatedly spoken against more “handouts” in the near term, in favour of tax cuts instead. Among her promises are cancelling the national insurance increase and scrapping a planned corporation tax hike. She has since said she would “look at the situation” with payments and potentially consider an increase after Ofgem confirms the price cap level later this month – but not offer any payments in subsequent years.

While Sunak would cut VAT, Truss would keep it but instead pause green levies on bills, such as subsidies for renewables and the ECO scheme, which provides funding for improving energy efficiency in low-income homes and social housing schemes. This is despite the evidence that this move would ultimately increase costs in the long run – a fact admitted by Lord Callanan.

Both candidates have repeatedly stated their intention to prioritise energy efficiency if elected, but precious little details have been released about their specific promises.

In the longer term, both Sunak and Truss have acknowledged that the UK will need to generate more energy at home using avenues other than gas. Gas accounted for almost 40% of the UK’s electricity generation mix in 2021 and this proportion may well increase in 2022 as nuclear capacity comes offline.

Both candidates stated that they will uphold the UK’s 2050 net-zero target, interim carbon budgets and commitments to change the energy mix. April’s Energy Security Strategy contained a raft of new support for fossil fuels but also boosted targets on nuclear and offshore wind. The overarching aim is a 95% ‘clean’ electricity mix by 2030. Little was announced to help onshore wind and solar, though, and Sunak and Truss have voiced their opposition to major expansions in these sectors.

Sunak or Truss will also oversee the Government’s ongoing work to get new and existing buidlings off of gas boilers and to reform the electricity market, with sweeping changes in the pipeline described as the most significant in a generation.

What are other parties proposing?

As one would expect, opposition parties have argued that the Tories are not making the right interventions to help homes with high costs in the near term nor to reduce Britain’s exposure to gas price shocks in the longer-term.

The Labour Party, like Sunak, has backed a reduction or scrapping of VAT on energy bills. It has also supported one-off payments this winter, but pushed the Government to fine-tune the design of the scheme to make sure the most vulnerable receive the most support, and prevent double-claiming.

Labour was the Party spearheading calls for a windfall tax on oil and gas and has stated that, if elected, tax breaks for the sector will be scrapped and the windfall extended to power generation. Funding raised through these avenues would back a new nationwide home retrofit scheme to replace the failed £1bn Green Homes Grant, covering 19 million homes within a decade, as well as measures to expand the nuclear, wind, solar and energy storage sectors.

The Green Party set out a five-point plan for responding to rising energy bills back in January. It proposed that grants should be made available not only to homeowners, but to landlords and councils too, and directed to fund immediate insulation improvements. It also advocated for the temporary removal of VAT from domestic fuel bills and a scrapping of the national insurance increase.

Like Labour, the Greens back a windfall tax on the oil and gas sector and an extension of the tax to gas-fired electricity generation. They also want longer-term certainty about carbon taxing and have argued that the Government’s historic lack of backing for wind and solar has increased Britain’s gas dependence.

The SNP’s Westminster lead Ian Blackford has stated that “whilst any financial support for energy bills is welcome, 60-odd pounds a month for six months will barely scrape the sides for those on low incomes who could face a monthly energy bill of half a grand next year”.

The party is pushing the UK Government to reinstate the Universal Credit uplift and consider a further increase, as part of a wider uprating scheme for benefits. Blackford has also advocated an increase in the minimum wage to a ‘real living wage’. Scottish Labour is pressing Nicola Sturgeon to hold talks with the energy advisory board as a matter of urgency.

Conversations are also brewing on the left around the re-nationalisation of energy. Campaign groups like Enough is Enough are highlighting how, in France, homes and businesses have only seen their electricity bills increase by 4%. France’s EDF is majority state-owned and its generation mix is nuclear-heavy.

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