Since the Iran war began, UK ministers have been careful to avoid any expensive promises to shield households from higher energy prices.
Sir Keir Starmer is “not ruling anything out” as the crisis unfolds, but he has made it clear the government is unlikely to intervene at scale until higher prices start to hit consumers — after the current cap on bills rises in July and then later in the year when colder weather forces people to turn on the heating.
But with political pressure mounting, analysts say the government needs a plan that can be rolled out quickly if needed, without blowing a hole in the public finances or disrupting the wider economy.
How bad could the price shock be?
The most immediate impact on consumers is through higher fuel prices, with a $100 oil price already feeding through to drivers at the pump. It is only in July, when regulated household bills are reset, that a rise to date of about 60 per cent in the wholesale price of gas will be felt. Other effects on consumer prices — for food in particular — will trickle through over months.
But despite calls for the government to freeze fuel duty, analysts at the Resolution Foundation say this is “not a serious response to the crisis” — as fuel costs are largely borne by richer families and the cost of filling a tank remains lower than it was before the pandemic.
The big issue is the potential for a steep increase in home heating and electricity bills before next winter. Ofgem, the UK regulator, has already set the price cap for the next three-month period, from April to June, at £1,641 for a typical household.
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This price cap is meant to be a fair reflection of the wholesale cost of energy and suppliers’ operating costs, while also including “policy costs” related to the government’s social and environmental schemes.
If current global prices are sustained, the increase in wholesale prices will push the cap above £1,800 in July, according to industry estimates.
This would still be below the level where the government stepped in with an “energy price guarantee” — limiting the average bill to £2,500 — at the height of the Ukraine-related price shock. But the intervention would have a more gradual impact, as more bill payers are now on fixed tariffs that guarantee a unit price for one to two years.
Andrew Sissons, a director at the research and innovation body Nesta, notes an energy shock would be “extremely painful for many households”.
It would also have powerful effects on the wider economy, as the likely hit to real incomes would curb consumer spending, while higher inflation could prevent the Bank of England cutting interest rates, hitting homeowners.
Can the government avoid budget-busting blanket support?
After the invasion of Ukraine, the UK spent about £35bn on schemes to hold down energy bills for households at all income levels — even before counting the cost of fuel duty cuts and targeted support schemes.
This universal coverage is now widely viewed as an expensive policy mistake that left the UK with a bad fiscal hangover and did nothing to encourage households to reduce their energy use.
The government is facing calls from the rightwing Reform UK party to cut VAT from energy bills — which chancellor Rachel Reeves decided against in her most recent Budget — and scrap green levies that are currently paid through bills rather than general taxation.
Some on the left favour even bigger interventions, with the think-tank Labour Together arguing that the government should step in immediately to prevent household bills rising at all — funding this by a temporary 2p increase in income taxes and a freeze on benefits.
“Normally, capping prices is a terrible idea,” said James Howat, the think-tank’s chief economist. But with voters already drifting towards fringe parties, he added, “we need a circuit breaker to stop energy prices from pushing up broader inflation and interest rates”.
Other economists reject this argument: blanket support would not only be unaffordable without straining market patience for higher borrowing or provoking voters with increased taxes, but it would also reduce the incentives for households to save energy and for the UK to reduce its long-term reliance on gas.
Instead, the government “should think smartly about how new support can target vulnerable families,” said Ruth Curtice, chief executive of the Resolution Foundation think-tank, which on Wednesday set out proposals for a “social tariff” for people with low incomes and high energy needs.
How would a social tariff work?
The Resolution Foundation’s proposal is to offer a discount on the unit price of gas and electricity to lower-income families without a fixed-price energy deal — leaving the better-off unprotected.
It estimates that funding of £3.75bn a year would allow the government to cut bills for about a fifth of the poorest 40 per cent of households. The same “budget” would allow for a 9 per cent discount on unit prices if offered to all households.
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To target support in this way, however, the government would need to access data held by energy companies on households’ energy use and tariffs, and link it with government-held data on incomes.
If this proves impossible before the autumn, an alternative would be to go further in removing green and social levies from energy bills — as Reform UK has suggested.
The Resolution Foundation said if all “policy costs” currently included in bills were stripped out, and instead funded through general taxation, the annual cost to the government would be about £3.75bn. It used this figure as a budget to compare the effects of its other policy options.
Are there other ways to structure support?
Other options, the Resolution Foundation said, would be to boost financial transfers to low-income households through the benefits system — although this would not accurately catch those with the largest needs.
An alternative, if the government does step in to help with energy bills, could be to introduce both a ceiling and a floor for gas bills, Sissons said, setting a range within which the unit price could move.
When it rose above the ceiling, the government would subsidise bills — but at times when it fell below the floor, the government would in practice be taxing them.
The policy would help the government fund support in times of crisis, Sissons argued — and would also help provide an incentive for a longer-term switch away from gas, whose volatility was “a big problem for the economy”.
Can the UK become less vulnerable to energy shocks?
Starmer has made much of the changes under way to make the UK less reliant on imported fossil fuels, from the long-term expansion of nuclear power to immediate plans to get plug-in solar panels on to supermarket shelves.
But the UK has lagged behind other European countries in the adoption of heat pumps, stalled previously on the development of onshore wind power, and been “nervous” of pushing households to take basic, low-cost steps on energy efficiency, such as insulating lofts and boilers.
This time, Sissons said — whatever the decision on fiscal support — the government “should be less squeamish”.
Data visualisation by Amy Borrett
