Liz Truss confirms price freeze for energy bills, dismisses windfall tax and lifts ban on fracking

Truss outlined a flurry of new energy commitments

The new package of measures was confirmed on Thursday (8 September) just days after Truss was named Prime Minister and unveiled her new Cabinet Ministers.

The package includes a new price freeze on household energy bills, effectively eliminating the £3,549 price cap due to come in October. Instead, the price cap has been frozen at £2,500 for the next two years from 1 October, which the Government believes will deliver a “pro-growth, pro-business and pro-investment approach for the country’s energy security”.

Additionally, Truss confirmed that the £400 payment to help all households with energy costs will still be rolled out next month. These measures mean that energy bills are expected to remain at around £1,974 for some households, which is what they have been since April.

Ofgem confirmed the price cap increase in late August. The move was expected to take average energy bills to £3,549 a year. The cap has already increased once this year. In April, it rose by 54% to £1,974, in reflection of the sharp increases in wholesale gas prices across Europe and beyond. The price crisis has already caused more than 25 UK energy suppliers to go bust, including Bulb.

It is important to state that while this has been branded an energy cost crisis, the key contributor to rising costs is gas. Analysis from the Energy and Climate Intelligence Unit (ECIU) has found that is likely to add £2,300 to the average costs increase to date and could surpass £3,000 next year  – around 95% of the total costs.

Prime Minister Liz Truss said: “Decades of short-term thinking on energy has failed to focus enough on securing supply – with Russia’s war in Ukraine exposing the flaws in our energy security and driving bills higher. I’m ending this once and for all.

I’m acting immediately so people and businesses are supported over the next two years, with a new Energy Price Guarantee, and tackling the root cause of the issues by boosting domestic energy supply. Extraordinary challenges call for extraordinary measures, ensuring that the United Kingdom is never in this situation again.”

Truss confirmed that new chancellor Kwasi Kwarteng will outline the expected costs of the package in a fiscal statement that will be unveiled later this month. However, estimates going into the package suggest that this could total more than £150bn.

MARKET REFORM

Truss confirmed a new commitment for the UK to become a net-energy importer by 2040.

A new Energy Supply Taskforce has also been set up that will see suppliers negotiate and agree on long-term contracts. Truss also confirmed that a new £40bn scheme would be introduced for firms in the wholesale energy market in a bid to “stabilise the market and decrease the likelihood that retailers need support from Government”. The scheme will be led by the Treasury and the Bank of England, to address the “extraordinary liquidity requirements” faced by energy firms operating in UK wholesale gas and/or electricity markets.

The Government confirmed that it is revamping the energy market temporarily in order to limit the amount of profits that suppliers can make. This, the Government claims, is to ensure that the new limits on energy bills stop taxpayers’ money from being funnelled into the profit margins of suppliers.

Indeed, energy market consultancy Cornwall Insight estimated that more than £40bn of the estimated £100bn of the proposed energy price cap could be redistributed as excess profits for the companies.

It has been reported that nuclear and renewable energy companies have agreed “at least in principle to accept new long-term contracts at fixed prices well below current rates”.

However, some believe this decision won’t make much difference. Labour’s Shadow Secretary of State for Climate Change and Net Zero, Ed Miliband, claimed that this move could “lock in massive windfall profits” for electricity generators.

Speaking to the BBC, he said that the proposals outlined by energy industry trade association Energy UK would “be a terrible deal for the British people, a terrible deal for bill payers. The right thing to do… is not to do some dodgy deal with these companies, but to do a windfall tax.”

This was backed up in the Commons by Labour leader Keir Starmer who claimed Truss’ plan leaves “vast profits of energy companies on the table” and that Truss was driven by “dogma”. Backbench Labour MPs alluded to her past positions at Shell as an alledged reason why she wouldn’t support a windfall tax.

Truss was adamant that another windfall tax on energy firms would not be introduced, claiming that it would deter investment.

“We can’t tax our way to growth,” Truss said. “It’s all about helping people with their energy costs. A [windfall tax] would discourage the very investment we need to secure a homegrown energy supply.”

FRACKING AND DRILLING

In what will be considered a disappointing decision concerning the UK’s climate commitments, Truss did reverse a ban on fracking.

The Government requested a review of the tremor risks associated with fracking in the build-up to the publication of the Energy Security Strategy earlier this year.

The Conservative Government imposed a moratorium on fracking in 2019 because companies leading extraction projects could not prove their ability to operate below a threshold for tremors they had previously agreed to. The Party’s manifesto also pledged to “not support fracking unless the science shows categorically that it can be done safely”.

Truss was vocal in her campaign that she would support fracking in areas where there was public support. However, a poll commissioned by Hanbury Strategy’s Green Unit and conducted by Stack Data Strategy, which polled 1,501 UK adults, found 39% would welcome the inclusion of fracking in the Government’s energy strategy. Support for fracking was stronger among those who voted Conservative than those who voted Labour or Liberal Democrat.

Some MPs, including new Chancellor Kwasi Kwarteng have voiced concerns over whether re-opening fracking sites in the UK would have any significant impact on the energy price crisis and whether it could be made compatible with the UK’s long-term climate goals. To this latter point, the Climate Change Committee (CCC) has advised against future fracking.

Truss also confirmed that new gas licenses would be issued for the North Sea oil and gas industry. A new licensing round has been announced and Truss expects more than 100 new oil and gas licenses to be awarded. This, Truss claims, would be supported by ramping up low-carbon technologies, including hydrogen, solar, CCS and wind. However, no actual targets for clean tech were set. The Government has confirmed it will continue to progress up to 24GW of nuclear by 2050,

Green Groups such as the Green Alliance have continuously argued that taxpayer money could be wasted on stranded assets by continuing to drill in the North Sea.

Some MPs have been vocal in their support for more drilling for oil and gas in the North Sea, especially given the spike in global gas prices. However, the Green Alliance states that opening new fields in the North Sea would be “uneconomic” given the “unstoppable rise” of clean technologies and the need to hit long-term climate goals.

The UK has one of the lowest taxes on oil and gas production, at around $2 per barrel in 2019, compared to $22 per barrel for nations like Norway. As such, major oil giants including BP and Shell are incentivised to drill in the North Sea. The Green Alliance notes that between 2016 and 2020, oil and gas companies received around £10bn in tax relief for exploration and production and £3.7bn in tax relief for decommissioning costs.

As such, the Green Alliance predicts that oil and gas production will become a significant annual expenditure, with taxpayers set to front the costs of an estimated £18.3bn in decommissioning figures.

BUSINESS RELIEF

Truss also confirmed that the Government will provide “equivalent guarantees” for energy prices for businesses for at least the next six months. This means businesses will see their energy costs capped at the same price per unit that households will pay. This will then be reviewed within the next three months and Truss added that the Government would work beyond the six-month timeframe to support vulnerable sectors like hospitality.

Truss also mentioned that the Government would launch a new landmark review into how net-zero can be delivered “in a way that is pro-business and pro-growth”.