U.K.’s new leader lays out sweeping plan to cap energy prices

LONDON – Scrambling to spare millions of households the pain of skyrocketing energy bills this winter, Britain’s new prime minister, Liz Truss, announced a sweeping plan Thursday to freeze gas and electricity rates for two years, at a cost of tens of billions of pounds to the British Treasury.

The plan, rolled out by Truss on her third day in office, could mean the largest government intervention in the economy in decades, even bigger than the emergency measures during the coronavirus pandemic, when the state spent 78 billion pounds (about $90 billion) to keep people in their jobs. While the government did not put a price tag on the policy, the head of the Institute for Fiscal Studies, an independent watchdog, said it could easily cost over 100 billion pounds just in the next year.

The move is intended to shield people from a jolting increase in energy costs next month, when the annual price for electricity and natural gas for a typical British household is scheduled to jump to 3,549 pounds, from 1,971 pounds. Under the plan, average annual costs would be capped at 2,500 pounds. Costs for businesses, charities and schools would also be capped for six months, underscoring the extraordinary reach of the program.

Truss announced that the government would lift a ban on hydraulic fracturing and grant approvals for new oil and gas drilling in the North Sea, part of a longer-term effort to make Britain less dependent on imported energy. But the new supplies will not flow quickly enough to avert the current crisis – mainly the fallout from Russia’s retaliatory cutbacks in gas supplies to Europe.

“This is a moment to be bold,” Truss said to a raucous House of Commons. “We are facing a global energy crisis, and there are no cost-free options.”

The energy price guarantee, she said, would save a typical household 1,000 pounds a year, and comes in addition to a 400-pound reduction on bills that the last government announced in May.

“We’re supporting this country through this winter and the next,” she said.

“The government has bought us, and itself, some breathing space,” Paul Johnson, the director of the Institute for Fiscal Studies, said in a statement, adding that it was disappointing that the government had not provided an estimate of the cost. “It needs to be immediately working out its exit strategy from this huge and costly intervention.”

Moments after Truss sat down in Parliament after announcing the energy plan, which was shaping up to be a noteworthy moment of her fledgling government, Buckingham Palace said that doctors were concerned for the queen’s health and that she would “remain under medical supervision.” Later, it was announced that Queen Elizabeth II had died.

For Truss, who campaigned on a message of tax cuts and deregulation, the energy bills policy was both a striking ideological reversal and a litmus test for her new government. Whether the plan will settle the nerves of people anxious about being able to heat and light their homes this winter could determine her fate as prime minister.

It could also help determine how successfully the West will weather Russia’s efforts to use energy as a weapon against European countries that imposed sanctions on Moscow after the invasion of Ukraine. Although Britain is far less reliant on Russian energy than Germany or Italy, the structure of its energy market makes it extremely sensitive to fluctuations in the price of natural gas.

For households, the price freeze “should have a pretty quick and material impact on confidence,” which had plummeted, said James Smith, an economist at ING. It should also decrease the severity of a coming recession, he added.

While Truss’ plan will help insulate millions of households from a harsh winter, a darkening sense of crisis has already taken hold in Britain. Rapidly rising prices for food, as well as energy, and lagging wage growth are squeezing household budgets.

At the end of August, 9 in 10 people said they had noticed an increase in their cost of living, according to the Office for National Statistics, which also reported signs that people had begun cutting back on grocery shopping, dining out and car journeys. Adjusted for inflation, pay in the second quarter fell at the fastest pace on record.

Across many industries, many workers in Britain have been unwilling to accept a deterioration in their living standards. Postal workers, train drivers, dockworkers and trash collectors are among those who have gone on strike in recent months to demand raises in line with inflation. Truss and her new ministers will also have to face down the threat of more walkouts by public service workers including teachers, nurses and civil servants.

National Energy Action, a charity, estimated that 6.7 million households would still be fuel poor – which means they spend more than 10% of their net income of energy – even after the freeze is imposed, as energy bills could still be more than double what they were about a year ago. The National Institute of Economic and Social Research, a London think tank, said the freeze would disproportionately benefit the richest households that also have the highest energy consumption and that the government should have introduced a variable freeze.

Government officials say the cost of the policy would depend on several variables, including the market price of gas. The measures announced Thursday won’t be paid for by any additional windfall tax on oil and gas companies, though the government is keeping in place a windfall tax introduced in May by the former chancellor of the Exchequer, Rishi Sunak, that was expected to generate just 5 billion pounds over the next year.

The measures are “very expensive and also inefficient,” said Jonathan Portes, a professor of economics and public policy at King’s College London, because they benefit all households, rather than just lower-income families, and the caps could lead to less energy conservation.

“The refusal to contemplate an increased windfall tax is purely ideological,” he said. This makes “no sense economically or politically,” he added.

Others have suggested that lifting the moratorium on fracking and additional oil and gas drilling in the North Sea amounted to a step back to fossil fuels.

Britain’s plan will require enormous borrowing, which could affect the government’s credit rating and the strength of its currency.

As the scale of Britain’s economic challenges have become clearer, investors dumped British assets over the last month.

The pound has traded this week at its lowest levels against the dollar since 1985, when Margaret Thatcher was prime minister, reflecting alarm about soaring inflation, a looming recession and how the government will fund so much more spending and tax cuts. Domestic stocks underperformed and Britain’s borrowing costs jumped higher.

One concern has been how Truss’ tax cuts and stimulus plans will be financed. A huge increase in borrowing is set to arrive just as the Bank of England is no longer buying large amounts of government debt. In fact, it has been considering a plan to start selling bonds back to the market.

This means Britain will need to rely on private investors at home and abroad to buy its bonds. Already, they are demanding higher returns to lend to Britain, perceiving a greater sense of risk. The yield on 10-year bonds climbed above 3% this week, the highest since 2011.

Capping energy rates, however, should take some of the steam out of the inflation rate, which economists had projected could peak anywhere from 13% to 22% by early next year. Consumer prices rose more than 10% in July from a year ago, the fastest pace in four decades. Truss estimated that the price caps could curb the inflation rate by up to 5 percentage points.

Still, it’s unlikely to slow the march higher in interest rates set by the Bank of England. Even if the overall inflation rate comes down, the government’s measures could put more money in people’s pockets, which, all else being equal, would increase demand and push inflation slightly higher, the bank’s chief economist, Huw Pill, told lawmakers Wednesday.

Higher levels of so-called core inflation, which strips out volatile food and energy prices and is more focused on the domestic economy, could persist and continue to put pressure on the central bank to raise interest rates.

Businesses and public sector organizations would see “equivalent support” to the household assistance for the next six months, with the possibility of an extension for vulnerable businesses, Truss said, without providing more details.

“We still need to see more from the government in terms of the support,” said Emma McClarkin, the CEO of the British Beer and Pub Association, but she said the announcement should avert the immediate threat to businesses from the energy crisis. The industry group has been lobbying for relief from energy bills.

Truss has said she will go ahead with a campaign promise to cut taxes, contending that it will help lift the economy overall. But some critics said such a move would only worsen the damage to Britain’s public finances and could exacerbate inflation by stoking more demand in the economy.

More details on the government’s tax cuts are expected to come later this month from the new chancellor. Some cost estimates for Thursday’s plan will also be revealed then, Truss told lawmakers.

In the meantime, “we don’t really know how much it’s going to cost,” Smith at ING said of Thursday’s policy announcement. Estimates can be calculated based on the market for energy prices, however that changes constantly. For now, he estimates that it will cost about 70 billion pounds in the first year. But “this could be an open-ended liability for the Treasury.”