Energy bills: More help may be expected next year, says think tank

By Michael Race
Business reporter, BBC News

Man looking at billImage source, Getty Images

The government is likely to come under pressure to help households with soaring energy bills again next year, the Institute of Fiscal Studies think tank has warned.

The IFS said calls for help were likely to continue for "at least" another year if oil and gas prices do not fall.

Energy bills are expected to keep rising until at least spring 2023.

But the government insisted the support package announced by the chancellor on Thursday was a "temporary" measure.

The £15bn package means every UK household will get an energy bill discount of £400 from October, with further support for the poorest households, pensioners and disabled people.

The new measures add to around £17bn of support already given by the government. This included one-off £150 council tax rebates for most homes in England and Wales and matched funding for the other devolved nations.

A steep rise in the cost of living, in particular a jump in energy prices in April, and a second one scheduled for October, had put growing pressure on the government to take action.

The announcement, which came a day after the publication of Sue Gray's report into rule-breaking at Downing Street during the pandemic, was on a larger scale than many expected.

The support was broadly welcomed and described as a "genuinely big package" by the IFS.

However, the think tank warned that it could prompt calls for additional support again next year, which in turn could contribute to further inflation.

"I think the biggest risk is that the chancellor will be tempted to do this again and again, and I think if that happens then we really could be in for a bit of trouble," IFS director Paul Johnson told the BBC's Today programme.

"He's got the most extraordinarily difficult decisions to make later this year on public sector pay, and then he'll be under pressure I suspect again this time next year when energy prices will still be high.

"I think if he's tempted to continue putting money in to an economy where inflation is very high then that becomes a significant risk."

Adam Scorer, chief executive of fuel poverty charity National Energy Action, said the chancellor's measures averted "the darkest of outcomes" but warned "millions will still be struggling and the energy crisis is far from over".

He said a "large, more targeted intervention is what was needed ahead of winter", and said the government needed to plan for energy prices to remain high for some time.

The cost of living is set to continue to rise, with inflation - the rate at which prices go up - at a 40-year high and forecast to hit 10% later this year.

Concerns have also been raised that the extra support for households could contribute to further inflation, by providing more spending power in the economy at a time when supply chains and the labour market are struggling to meet demand.

However, Chancellor Rishi Sunak insisted that his new measures would have a "minimal impact" on inflation.

Higher energy prices, caused in part by the war in Ukraine, have been a key factor driving inflation and analysts expect energy costs to remain high.

Cornwall Insight, has predicted the energy price cap, which limits how much providers can raise prices, will be marginally higher in spring 2023 to around £2,818 than the price cap this autumn at £2,791.

The cost of the extra support for energy bills will be partly offset by a 25% additional tax on oil and gas firms' profits, which have soared in recent months.

Opposition parties had been calling for a windfall tax on energy firms for several months.

A windfall tax is a one-off levy imposed by a government on a company. The idea is to target firms that were lucky enough to benefit from something they were not responsible for - in other words, a windfall.

Mr Sunak said the "energy profits levy" had been designed so it would "incentivise and encourage investment".

But Dan Atzori, research partner at Cornwall Insight, warned the tax came with "risks to both investment and energy security".

If windfall taxes were repeated over time, Mr Atzori said, it risked "creating an unstable environment, and may lead to energy producers, who operate globally, investing and relocating to other areas".

Image source, Getty Images

The government had previously rejected the idea of a windfall tax on energy firms' profit, but Mr Sunak said with the sector "making extraordinary profits" he was "sympathetic to the argument to tax those profits fairly".

However, energy giant BP said while it knew "how difficult things are for people" Thursday's announcement was "not for a one-off tax" but a "multi-year proposal".

"Naturally we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans," it said.

The body which represents oil and gas firms, Offshore Energies UK, said the levy would "drive away" investors and cut UK energy production.