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What might Liz Truss do about soaring energy bills?

<span>Photograph: True Images/Alamy</span>
Photograph: True Images/Alamy

Assuming she becomes prime minister next week, Liz Truss and her potential chancellor, Kwasi Kwarteng, will be considering options to tackle the cost of living crisis, particularly for those paying high energy bills. Here we consider her possible moves.

Targeted help for the most vulnerable

Although people with relatively high incomes could struggle to pay their energy bills this winter, Truss has made clear that any support payments will be targeted to help the most vulnerable. Many such people are already in fuel poverty and struggling, and the price cap will shoot up by 80% in October. Truss has erred against universal “handouts”, and could focus on aiding pensioners and those receiving universal credit by extending the £650 being given to the 8m lowest-income households, and the £300 payment to a similar number of those who are retired.

Fuel discount rise from £400 to £800

A quick way of helping the most number of people would be to double the discount on domestic fuel bills. Beginning in October, £400 will be paid out across six instalments to about 29m households. Officials have been looking at increasing that, potentially to double the amount, because forecasts for price rises are considerably higher than when the initial support was put in place. This discount is easier to administer but a blunt instrument as more well-off households will benefit from the allowance.

Tax cuts

A menu of tax cuts is Truss’ favoured route. She has already vowed to reverse the controversial national insurance contributions rise, but could make this just apply to workers and leave the increase in place for businesses. The planned corporation tax rise, from 19% to 25%, from 2023, could also be pared back. Truss has also reportedly examined plans to cut VAT across the board, either reducing it from 20% to 15% or as low as 10%. If that more drastic move is not pursued, she could still remove VAT from energy bills, which would be expected to save the average household £160.

New windfall tax to freeze price cap

Truss has ruled out a further windfall tax but Treasury insiders feel that with energy companies due to make in excess of £170bn profits over the next two years the move is inevitable. Kwarteng is said to believe it might be necessary. He could opt to extend the energy profits levy, introduced for North Sea oil and gas operators, to renewable energy firms. The levy is popular with Tory voters and could provide leeway for the government to help with bills, possibly by adopting Labour’s plan to freeze the energy price cap at its current level of just under £2,000 a year rather than allow it to rise in line with global wholesale gas prices.

Deficit fund for suppliers to cover fuel price rise

An idea suggested by heads of energy firms suggesting the government sets up a deficit fund to cover the difference between what people pay and how much it costs to supply their homes with gas and electricity. The fund could be underwritten by the government, or financial institution, and repaid by consumers over a period of 10-15 years to smooth out the costs. Suppliers would be expected to use the time that the scheme is in place to focus on green energy investment. While this would spread out energy bills, easing some of the pain today, it would still build up costs for the future.

Decoupling of electricity from gas

Truss could follow the lead of the European Commission, which has promised measures to curb soaring wholesale electricity prices. Brussels is investigating reforming the marginal pricing system in which the most expensive power plant called on to meet demand on any given day sets the wholesale electricity price for all suppliers. This means gas-fired power stations, which are still needed to keep the lights on in many countries, tend to dictate the wholesale electricity price for the rest of the market even though renewable power can be produced more cheaply. The UK government has already begun a consultation on decoupling its prices of gas and renewable power.

Usage linked reductions

The chief executive of UK’s third largest energy supplier, Ovo Energy, has called for the government to introduce a “progressive” scheme to tackle bills. This would involve reducing the price of energy, but only for a limited amount of use per household, meaning that energy consumption beyond that level would be charged at a higher price. This would aim to prioritise support for poorer customers, since higher-income households typically use more energy, according to Stephen Fitzpatrick, the founder of Ovo, which serves 4.5 million customers.