British households will have their annual energy bills capped at £2,500 for two years in a £130bn+ scheme that will save consumers thousands of pounds.
Prime Minister Liz Truss said the two-year Energy Price Guarantee will begin at the start of October and that the government will pay energy suppliers the difference between the cap and what they would have charged without any intervention.
The £2,500 figure is above Ofgem’s current £1,971 energy price cap, but far below what the cap would have risen to next month and in January.
Businesses and public sector organisations have been promised “equivalent support” for six months, however exact details of the plan have yet to be announced.
More support will be given after six months for businesses that are in “vulnerable industries”.
The Prime Minister also announced a raft of measures intended to increase domestic energy supply, including lifting the moratorium on fracking, new licensing for oil and gas exploration and a review of the UK’s 2050 Net Zero target to ensure it is “pro business and pro growth”.
“Extraordinary challenges call for extraordinary measures, ensuring that the United Kingdom is never in this situation again,” Truss said.
Truss said the government estimates the plan will ensure UK inflation is 4 or 5 per cent lower than previously predicted, meaning “a reduction in the cost of servicing government debt”.
The FTSE100 nudged up by 0.37 per cent in the wake of the news.
The Federation of Small Businesses (FSB) chair Martin McTague said: “It’s a huge relief for millions of small businesses to hear confirmation they will be part of the Government’s plans to help on energy.
“Constricting the scale of energy bills for small businesses is unprecedented; we now have a high-level commitment in principle to help businesses get through the winter intact.”
The long-awaited package is the largest fiscal intervention in the energy market ever by a UK government and comes after Truss originally said in the leadership campaign that she was not in favour of “handouts”.
It comes as energy prices were set to almost triple for households by January and increase even more for businesses, who did not fall under Ofgem’s energy price cap.
The plan will mostly be paid for through increased borrowing, driving the UK’s debt pile to even higher levels, with exact figures to be outlined by chancellor Kwasi Kwarteng later this month.
Labour has called for the package to instead be paid through a further windfall tax on North Sea oil and gas.
Truss said: “This is the moment to be bold. We are facing a global energy crisis and there are no cost-free options. There will be a cost to this intervention.”
Labour leader Sir Keir Starmer said “the real question the government faces, the political question, is who is going to pay?”
“The Treasury estimates that energy producers will make £170bn in unexpected windfall profits over the next two years,” he said.
“The head of BP has called this crisis a cash machine for his company and households are on the other end of that cash machine – their bills funding these eye watering profits.”
Paul Johnson, director of the influential Institute for Fiscal Studies (IFS) think tank, said that it was “concerning that it appears to be committing to this policy through next year as well as this”.
“It is perhaps forgivable not to be able to come up with something better designed and better targeted right now,” he said.
“Surely there should now be a concerted effort to come up with something better for next winter.”
PwC economist Jake Finney said “Liz Truss’ plan to freeze household energy bills for two years at £2,500 could mean that inflation is already at or close to its peak of around 10-11 per cent”.
“This is significantly lower than our expected peak of 17 per cent in 2023 based on early September market implied energy price paths and without government intervention, when household energy bills were set to reach around £5k a year,” he said.