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Chancellor Rishi Sunak has warned colleagues that there is a limit to how much help the government can give to offset soaring energy prices, and that support should be targeted at UK households that need it most.
Kwasi Kwarteng, business secretary, will meet industry leaders on Wednesday to discuss several options that could help households contending with the spike in energy prices and the broader cost-of-living crisis.
Options being considered by the business department and the Treasury include cutting value added tax on energy bills, increasing the warm homes discount available to vulnerable households, as well as providing loans to energy companies so that they can in turn help consumers.
Industry executives admitted that there were drawbacks with all the options but insisted that action was needed both to assist households and to prevent further collapses of energy suppliers.
More than 20 suppliers have gone bust since the start of August because of the surge in wholesale gas and power prices.
Talks took place on Tuesday between Greg Hands, energy minister, and industry executives, who will now meet Kwarteng.
Sunak has not ruled out the temporary removal of the 5 per cent VAT rate on energy bills, which the Labour party has called for.
But he has privately argued that such a move, which would cost £2bn a year, would be poorly targeted since it would also benefit people who were relatively well off, according to the chancellor’s allies.
“There’s only so much the government can do,” said one Sunak ally, noting that energy prices could remain high for a significant time.
Sunak, who is waiting for government officials to draw up detailed proposals after representations by the energy industry, is wary of making an open-ended commitment when he is trying to rein in state borrowing.
Asked about rising energy bills, Boris Johnson, prime minister, said at a press conference on Tuesday that Sunak was “mindful” of the problem. “We are going to do what we can to help,” Johnson added.
Johnson said in 2016 that one of the benefits of Brexit would be that the government would cut VAT from energy bills.
But on Tuesday he said: “The argument is that it is a bit of a blunt instrument and you end up cutting fuel bills for people who don’t need the same help.”
Energy suppliers sent submissions to the government late last year setting out options that could both reduce the spike in bills for households and prevent the collapse of more companies.
The government is working against an effective deadline of February 7, which is when the regulator Ofgem will announce the new level of the energy price cap that will kick in from April.
Analysts have warned that annual energy bills for 15m-plus households in Britain that are covered by the price cap could rise by 56 per cent, or nearly £720, from April.
UK wholesale gas prices are trading at more than three and a half times the level they were at the start of 2021. They have in turn pushed up power prices, given Britain’s significant dependence on gas-based electricity generation.
One option floated by the industry is for the Treasury to underwrite billions of pounds of loans to energy suppliers to help them spread the cost of higher electricity and gas bills paid by consumers over several years.
Another option is a temporary mechanism under which suppliers would receive payments from the government if wholesale gas and power prices surpassed a certain level.
All of these options are under discussion, according to government figures, but one said that none provided a “silver bullet”. Officials also cautioned against the idea of an imminent solution.
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