Energy price crisis: Treasury’s rebate scheme branded ‘sticking plaster’ for UK’s gas reliance

Ministers have faced mounting calls to address the cost of living crisis

The current price cap has, so far, served to protect millions of consumers from rapidly increasing gas prices – largely caused by discrepancies between demand and supply globally, including Russia decreasing its exports. However, the fact that prices have not been passed onto the consumer has led to 29 UK-based energy suppliers ceasing trading over the past 12 months.

Ofgem reported a rise in the average price of gas per therm from 49p at the start of January 2021 to 112.5p at the end of November 2021. Within the same timeframe, electricity prices per megawatt-hour increased from 53p to 112.5p. Prices have continued to rise, with warnings that policy inaction could lead to increased prices through to the end of the decade.

As such, Ofgem has announced an increase to the price cap this morning (3 February). From April, Ofgem has confirmed, this amount will rise by 54% to £1,971.  The changes will affect 22 million homes.

Ofgem was originally due to make the announcement on Monday 7 February but pulled the statement forward. The regulator has been keen to emphasise that the primary cause of the increased cap is a “record rise in global gas prices over the past six months”.

“We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can,” said Ofgem boss Jonathan Brearley, confirming that the ombudsman will announce specific new customer support schemes tomorrow (4 January). 

It is worth noting that Ofgem is expected to increase the price cap further ahead of winter 2022/2023. edie’s sister title, Utility Week, is reporting that the average UK home could see gas and electricity bills rising to £2,448 per year once this further increase is completed, based on current forecasts for wholesale gas prices. Ofgem is also planning to gain powers to update the price cap more regularly; at present, the updates can be made every six months. 

Chancellor Rishi Sunak gave a speech following the announcement from Ofgem, which was made at 11am. The measures he unveiled are the culmination of weeks of talks between the Treasury, 10 Downing Street and the Department for Business, Energy and Industrial Strategy (BEIS).

What was – and wasn’t – announced by Sunak?

As had been widely reported, Sunak announced a multi-billion-pound package for a “rebate and clawback scheme”. Under the scheme, the Treasury will underwrite loans to energy suppliers, who will be required to use them to provide a rebate on domestic energy bills.

This approach, Sunak stated, should shave £200 off of the average home’s annual dual-fuel bill, increasing to up to £500 for the lowest-income homes. The discount will be applied in October. 

A Government spokesperson has told national titles including the Sun that the Treasury will, in total, set aside £12bn for the scheme over this financial year and the next financial year. At least £6bn will be allocated in this financial year.

The Government is planning to recoup the money from the scheme by requiring households to pay back the £200 over a five-year period. 

To accompany the “rebate and clawback” scheme, Sunak announced extension to the Warm Homes Discount scheme, which, at present, enables low-income homes and those claiming pension credits to claim £140 off their electricity bills each winter. The extension will widen the eligibility criteria and increase the one-off payment. Sunak has said that the number of homes eligible for the scheme should increase by a third as a result of the changes. 

Also announced by Sunak today was an extension of the Council Tax Discount. All homes in council tax bands A, B, C and D – which collectively cover 80% of homes – will see a £150 discount in April, with the Treasury footing the bill. 

In total, the measures announced today will cost the Treasury £9bn, Sunak said. 

The Treasury has already rejected proposals to remove VAT from energy bills temporarily, as well as a motion for Labour to implement a windfall tax on the UK’s oil and gas industry. Greenpeace claims that applying an average level of tax of 70% to the sector – up from 40% at present – could raise £4bn and support the UK’s net-zero transition. Some MPs and Treasury representatives have voiced concerns that it could discourage investment in the sector’s transition and the scaling up of technologies including low-carbon hydrogen production and carbon capture and storage (CCS).

It remains to be seen whether Sunak will remove environmental and social levies including the ECO levy from bills. This move has been backed by some backbench Conservative MPs and pedalled by outlets including The Telegraph. Carbon Brief has analysed how, in the long-term, removing such moves ultimately increases energy bills in the long-term.

Should Sunak move to pause these levies, he will need to come up with alternative measures to fund energy efficiency programmes. Should they be scrapped, there will be an increase in general taxation – which would, of course, prove unpopular.

Click here for the Treasury’s full announcement. 

Green economy reaction 

Commenting on the measures announced by Sunak, the Energy and Climate Intelligence Unit’s (ECIU) deputy director Sepi Golzari-Munro said: “High global gas prices are expected for another few years at least. The Chancellor’s proposal, while giving short-term relief, provides little more than a sticking-plaster on the open wound left by the UK’s gas dependency. 

“With many predicting high gas prices for years to come and the price cap rising again in October, the importance to vulnerable households of insulation schemes such as ECO, which is due for a boost in April, cannot be exaggerated. The question now is, will it be enough?”

Former Npower chief executive Paul Massara said: “It is positive that the Government is acting to help households with the increase in energy bills and I would especially welcome the increased funding to the Warm Home Discount, aimed at helping those most vulnerable. 

“However even with this help, which in part will only see the increased deferred, we will still see bills going up by £500.  The longer-term solution for energy bills, climate change and the geopolitical risks from Russia, is greater investments in energy efficiency programs.” 

UCL’s energy and climate change professor Michael Grubb said: “The gas crisis is driven by international markets; domestic production is almost irrelevant to the prices in the UK.  But around half the cost increase that consumers face is from the knock-on impact on electricity bills. That’s because, at present, gas plants set the price for all even though they account for less than half our generation.  

“Beyond the short-term sticking plaster, we need more renewables to reduce our dependence on gas, and reform the system so that consumers can engage more directly with low-cost renewable energy generation. Consumers now are paying the price of the short-termism of the Treasury, particularly in blocking measures to improve household energy efficiency, and for the obstacles put in the way of onshore wind energy in particular.” 

The Energy Saving Trust’s chief executive Mike Thornton said: “With the number of households who find themselves in fuel poverty expected to rise, while the Government has taken steps today it must now go further to provide support to those most in need. 

“As well as the need for immediate action and short-term support, the current crisis emphasises the importance of improving the energy efficiency of the UK’s housing stock in the long-term. Alongside this, we need to invest significantly in renewable energy – including low carbon heating.  Energy efficiency and more renewables are the best ways to protect everybody against volatile gas prices and rising bills in the long term. 

“Tackling the current energy crisis must also go hand in hand with meeting net-zero ambitions. Reducing our reliance on fossil fuels will minimise our exposure to the volatility of the global energy market and shape a greener and more affordable energy future. Alongside many other mission-led organisations, we’re asking for committed Government investment and clear action plans to scale up home insulation and renewable energy so we can be less reliant on gas in the future.”

The Association for Renewable Energy and Clean Technology’s (REA) chief executive Nina Skorupska said: “The Government’s package of measures will bring an element of respite to both households and energy suppliers, and covers some of the measures we have been calling for.

“However, these policies alone will not cover the expected energy bill increases and don’t address a fundamental reality – as long as households are at the mercy of volatile fossil fuel prices, we will continue to see people struggle to pay the bills.

“That is why the Government must address the scale of the problem by providing catalysts to improve the insulation of homes and to drive up the installation of domestic renewables and clean technology. If the Government does not accelerate the energy transition, the cost of living crisis will get more severe, and harder and more expensive to fix.”

The Association for Decentralised Energy’s (ADE) chief executive Lily Frencham said: “The way to protect households from energy price rises in the long-term is to remove our exposure to volatile gas markets through heat decarbonisation and energy efficiency. 

“The Government has stepped in today with sticking plasters for the next few months. However, it is not enough – either for the immediate crisis that could well continue into next year or for the long term. Now, it needs to learn from this crisis to go harder and faster towards making people’s homes affordable, comfortable and net-zero.”  

RenewableUK’s chief executive Dan McGrail said: “The measures set out by the Chancellor to provide support for hard-pressed families struggling to cope with the eye-watering hike in international gas prices are very welcome, but the UK needs to phase out fossil fuels as fast as possible to provide long-term energy security and certainty for consumers.

“Figures published today by Ofgem show that green levies are falling, so anyone attempting to blame renewables and net-zero is seriously misinformed. Let’s be clear – this is a crisis caused by the soaring cost of gas.

“In the last three months of 2021, wind and solar power were so cheap that they actually paid back nearly £160m to consumers, reducing energy bills. The escape route from volatile and uncontrollable gas prices couldn’t be clearer – investing in our green future secures low-cost reliable power as well as getting the UK to net-zero as fast as possible”. 

The Energy and Utilities Alliance’s chief executive Mike Foster said: “The proposed loan to energy companies to keep bills £200 lower now, but to be paid back later, is a stunt designed to appear to help. It is a heat now, pay later scheme that simply delays the pain not reduce it.

“But the fundamental root cause of the problem has not been addressed in today’s announcement. How does the UK shift away from global fossil fuel prices? We now need a firm commitment from the Government to wean us off natural gas and onto hydrogen, which we can produce ourselves, and convert our world-class gas network to run on hydrogen. That way, Putin will not hold us hostage, with his fingers turning the gas taps off, jacking up prices and forcing UK households to choose between heating and eating.”

Abundance Investment’s co-founder Bruce David said: “The fact we are paying for our energy on the world’s biggest single Klarna deal – buy now, pay later – is a chilling reminder of the cost of failing to invest in home-made green energy that cannot simply be exported to the highest bidder on the global market.

“This should be a wake-up call for us all to think how we can channel our record levels of cash savings into green investments that not only reduce our reliance on volatile gas prices, but also divert that pent up spending to productive and anti-inflationary outcomes.”   

Sarah George