Ministers discuss ways to offset energy price surges caused by Iran war | Energy bills
Ministers are discussing the possibility of intervention to protect the public against rising household energy bills if the conflict in the Middle East continues.
Oil and gas prices have risen since Donald Trump launched a bombing campaign against Iran, which responded by blocking a key shipping route in the Strait of Hormuz and attacking its energy infrastructure.
Household energy bills will remain flat until July, when the energy price cap will be set by regulator Ofgem. Estimates then suggest this figure could rise by 10 per cent, adding £160 a year to the average bill.
Energy Secretary Ed Miliband is understood to believe that prices cannot be allowed to rise significantly, just as the government can claim to have reduced bills due to decisions taken in the last budget.
An energy department source said: “Lowering bills is one of our key cost-of-living messages. We cannot allow bills to rise again, even if it requires further support for households. We hope the situation in the Middle East will improve but we are planning for all possibilities.”
Another minister asked what the government would do if bills rise sharply this July: “This can’t happen.”
Treasury sources said any discussion of reductions was premature, but conceded it should be on the table if the conflict drags on.
Analysis by the Çözüm Foundation earlier this week suggested that the energy shock could well destroy the expected gains in living standards this year.
Chancellor Rachel Reeves promised to “protect families from the turbulence we see beyond our borders” in her spring forecast speech on Tuesday. When governments lose control of the economy, he said, people feel it “in their pay packets, their bills and their mortgages”; This contradicts Labour’s approach.
As well as increasing energy bills, rising oil and gas prices have also caused markets to reduce expectations for an interest rate cut by the Bank of England; This was another way Labor hoped households would start to feel better.
Energy providers are already starting to change their fixed price tariffs, according to industry figures. According to MoneySuperMarket, 57 fixed-price tariffs have been removed or updated in the last 72 hours.
One frontbench MP said: “If we could suddenly find £10bn because the ever-wrong OBR changed its mind last November, we could find £10bn to reduce people’s bills today.”
Another minister said: “I don’t think it would be credible for us to say people should bear the costs when even Liz Truss wouldn’t allow it.”
But experts are already warning the government against a sweeping bailout launched by Truss in autumn 2022 following Russia’s invasion of Ukraine, costing more than £30bn over two years.
“This type of government support is a key reason why debt has increased in recent years,” said Helen Miller, director of the Institute for Fiscal Studies (IFS). He called on ministers to “direct aid to where it is needed most”.
Similarly, the Çözüm Foundation said the fresh energy price shock would increase the urgency of calls for a “social tariff” that would provide cheaper energy to the poorest households.
Labor MP Graeme Downie, a member of the Energy Security and Net Zero select committee, said the government needed to show it was being proactive. “The government has taken tough steps to invest in infrastructure, secure the UK’s energy future and control costs for businesses and households, but unless it firmly points blame for increases in energy costs through Iran’s actions and is prepared to intervene to support ordinary people, there is a real risk that the public will turn on the government for something that is not their fault.”
Sam Alvis, deputy director for environment and energy security at the IPPR think tank, said: “The actions the government needs to take to materially reduce energy prices for people are limited, and none of them are free. But given both the direct inflationary benefits of acting on energy prices and the cost of living, which was the public’s number one priority before the war in Iran, there are now several other significant ways to spend spare fiscal space.”
“There are three ways the government can help households: firstly, by increasing access to solar power, batteries or electric vehicles, which protects households from rising gas prices. Secondly, we pay for a lot of things through energy bills – the government has already moved some of these into general spending, it would be fairer to make the costs of new infrastructure more fair, especially. Thirdly, potentially increase the warm homes discount to support the most vulnerable – but this too currently shows up as a cost on bills.”
If a protracted conflict causes energy prices to remain high for a long time, Reeves is also likely to come under pressure to cancel an oil tax increase planned for September; This is something the Liberal Democrats have already demanded.
The 1p per liter increase announced in the November budget will be followed by a 2p increase in December and a 2p increase next March; This would reverse the cuts made by Boris Johnson’s government in 2022 following Russia’s invasion of Ukraine.
