Liz Truss’s two-year freeze on energy bills will benefit richer households more than poorer ones during cost-of-living crisis, think tank warns

• Resolution Foundation finds richest fifth of households may gain £1,300
• This compares with £1,100 for the poorest 20 per cent, the think tank says
• More cost of living help – through cutting NI – will ‘skew support’ towards richest

Liz Truss’s two-year freeze on energy bills during the cost-of-living crisis will benefit richer households more than poorer ones, a think tank has warned.

In a new report, the Resolution Foundation found the richest fifth of households may gain an average of about £1,300 this winter, compared with £1,100 for the poorest 20 per cent.

This is because higher-income households typically use more energy, the think tank said.

In one of her first acts as Prime Minister, Ms Truss last week unveiled an ‘Energy Price Guarantee’ to freeze gas and electricity bills for families.

It means a typical household will now pay up to an average £2,500 a year on their energy bills for the next two years.

This is around £500 higher than they are now, but £1,000 lower than they would have been from 1st October under Ofgem’s price cap.

The Resolution Foundation acknowledged the action was an ‘all-but-inevitable response’ to the cost-of-living crisis.

It had previously been forecast, without Government intervention, that energy bills could soar past £5,000 a year from next year.

The think tank found Ms Truss’s freeze on energy bills, together with the previously announced £400 energy bill rebate, would cover 76 per cent of the increase in bills compared to last winter.

The report said this would ‘soften the coming squeeze on incomes by reducing inflation by around four percentage points in January’.

But the Resolution Foundation also warned ‘this winter will still be tough for many’.

It had previously been forecast, without Government intervention, that energy bills could soar past £5,000 a year from next year 

Liz Truss, who attended a memorial service for the Queen in Belfast today, unveiled an ‘Energy Price Guarantee’ last week in one of her first acts as PM

‘Typical pre-payment meter customers will still need to find £264 in cash for January’s energy use alone, down from £550 had the Government announced no more support,’ their report added.

‘And energy bills are far from the only price rise facing households.’

They also criticised the failure to provide more targeted support for those most in need.

‘Less defensible is that this near-universalist intervention (which is dictated by the difficulty of targeting bill reductions on a wide range of low-and-middle income households) follows other universal or near-universal support announced earlier this year, such as the £400 energy bill discount and £150 Council Tax rebate,’ the report said.

‘The result is that, while lower-income households will be far harder hit by price rises this year, the combined impact of all measures introduced to support incomes in 2022-23 is being felt broadly equally across the income distribution (in cash terms), with an average gain of around £2,200 – of which only slightly more than half is in the form of the new guarantee.’

The think tank also issued a warning that Ms Truss’s promise of further cost of living support – through scrapping the hike in National Insurance – would ‘skew support towards the very highest income households’.

They found the combination of the EPG and the National Insurance cut could leave the 10 per cent with the highest incomes benefiting by £4,700 on average while the poorest tenth receive £2,200 in 2023/24.

Resolution Foundation chief executive Torsten Bell told BBC Radio 4’s World At One programme: ‘Next year, twice as much support goes to the richest households as the poorest households, whereas this year everybody gets a lot.’

The think tank’s report said the cost of the EPG, which will be funded by borrowing, ‘could eclipse the £137 billion worth of bailouts for banks during the financial crisis’.

It noted ‘the Government is now bearing all the financial risk related to future movements in gas prices’.

They said there was a ‘strong case’ for extending windfall taxes on oil and gas producers but also an argument for implementing a ‘solidarity tax’ of some form on the rich to help cover the cost.

A one per cent increase in income tax would raise £9.5 billion, with 60 per cent paid by the top fifth of households ‘who may benefit by over £13 billion a year from the EPG’, the report added.

How will the new energy bill bailout work? 

What is Liz Truss planning?

Britain’s new PM has announced a freeze on average energy bills of £2,500. The freeze is more than £1,000 below the latest energy cap of £3,549, which is due to come into effect in October. Households will also still get a £400 rebate, a policy announced in the summer. It’s going to last two years.

How will it work?

Ministers will sign legal contracts with the energy suppliers requiring the firms to supply domestic customers with fuel at a fixed price. The taxpayer will then make up the difference between the fixed price and the market level.

Will businesses get support?

Yes. Ms Truss said that business will get ‘equivalent’ support – but it will only last for six months initially. After that it could be targeted to ‘vulnerable’ areas of industry.

How much will it cost?

Estimates of the total cost vary wildly and will depend on the wholesale price of energy. A Whitehall source said £100billion would be at the ‘top end’ of expectations, but ministers admit privately it could cost £150billion or even more if gas prices continue to soar.

How will it be paid for?

The huge cost is set to be paid for out of general taxation. Ms Truss has ruled out extending the new windfall tax on energy firms, saying it could hit investment in future supplies.

Will it reduce the risk of blackouts?

No. Experts have warned that the plan could increase the chances of power shortages this winter as consumers will have less incentive to cut consumption. With other European countries also considering price freezes and Russia threatening to further cut supplies, there are growing fears of potential blackouts if still weather conditions mean wind turbines cannot operate.

What is the long-term strategy?

The Prime Minister also unveiled plans for a radical increase the UK’s domestic energy supplies in a bid to make Britain less reliant on global markets. This will include a dash for gas and oil in the North Sea and a renewed drive to build more nuclear power stations. Ms Truss is also lifting the ban on fracking, potentially opening up huge new reserves of gas if communities can be persuaded to accept the controversial technology.

Will fracking be forced on local communities?

Fracking has been controversial and was halted in 2019 because of concerns about earth tremors. But the industry insists it is safe, and a recent technical study for ministers – which has yet to be published – is said to have opened the door to its resumption as long as environmental protections are put in place. Ms Truss and new Business Secretary Jacob Rees-Mogg are open to industry demands to relax tight planning restrictions on the technique. And fracking firms are planning to offer local people discounts of up to 25 per cent off energy bills in communities where shale gas is extracted.

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