UK looks at payments to energy suppliers to shield consumers from high bills

19/01/2022 10:35
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The UK is exploring a radical intervention in the power market under which the state would make payments to energy suppliers when wholesale gas prices rise sharply in a bid to soften the blow to consumers

The proposal, which is being promoted by energy companies, is described by government insiders as “plausible” and “logical”, but they admit there are also many downsides to such a step.

Under the initiative, energy suppliers would receive payments from government when wholesale gas prices exceeded a certain threshold so they would not then have to pass the hike on to consumers.

Some suppliers say the proposal - known as a temporary price stabilisation mechanism - could be self-funding over the course of several years as energy companies would have to return money to the government when wholesale prices traded below the agreed level.

Rishi Sunak, chancellor, accepts this could leave the taxpayer heavily exposed if wholesale prices remain high, but he has been discussing with Boris Johnson, the prime minister, ways to mitigate a cost of living crisis, officials say.

Without action by Downing Street, a price cap on household energy bills could rise from £1,277 a year to over £1,900 in April — fuelling inflation — and coming at the same time as tax rises take effect.

Johnson faces local elections on May 5 that could decide his political fate and is looking for “red meat” policies in the coming weeks to shore up his weakened premiership ahead of those polls.

Other options to cushion the impact of soaring energy prices have their own problems. A cut in VAT on domestic energy from 5 per cent to zero is still on the table, but has been described by Johnson as a “blunt instrument” helping both rich and poor households.

Ministers have also gone cold on providing government-backed loans to energy companies. Some estimates put the scale of the required lending at £20bn and one person briefed on discussions said: “Some of the firms would not be able to take on any more credit risk.”

Sunak is looking to offer targeted support to poorer households - possibly through an expansion of the warm home discount scheme - but ministers are looking to go considerably further.

Emma Pinchbeck, chief executive of the trade body Energy UK, confirmed on Monday that suppliers were discussing with the Treasury a mechanism to smooth out spikes in wholesale prices for consumers.

Read the full story here.

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