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  • The energy price cap – 3 questions that still need answering

    Following the recent announcement of the £2,500 energy price cap, we look at three questions that still need answering.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    This article is more than 6 months old

    It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

    Whenever we think about money – whether it’s spending, saving or investing – energy price worries make it hard to focus on anything else.

    The energy price cap Ofgem announced for October was £3,549, for the upcoming year, but the figures forecast for January were even more alarming – at £4,266. The recent announcement of a guarantee that the energy price cap won’t rise above £2,500 in either of the next two years is therefore a welcome relief. But there are still some key questions that need answering.

    This article isn’t personal advice. If you’re not sure if a course of action is right for you, seek advice.

    Is it enough?

    It’s not quite a freeze, but once the £400 payments being made to every household are factored in, prices should be roughly similar this winter. If you get the £300 payment for anyone on a State Pension on top, then it will more than offset the additional cost.

    The first key question is what happens when this money runs out. If there are no additional payments in year two, then we’ll all have to wrestle with higher prices.

    It’s also worth bearing in mind that millions of people are already struggling to pay the bills, so a freeze isn’t going to go anywhere near solving the horrible financial problems they face. Just under half of people are already finding it either somewhat difficult or very difficult to pay their bills.

    The announcement offered no extra targeted support for anyone who’s already reached crisis point. Anyone on means-tested benefits, state pensioners and people with a disability will receive lump sum cost-of-living payments this autumn and winter, which will provide some support.

    However, there’s every chance these payments will be needed for rising costs elsewhere, so won’t stretch anywhere near as far as the government hopes. Citizens Advice said that after the first payment in July, the demand for food bank vouchers fell for just three weeks before returning to previous levels.

    How will it be paid for?

    There’s also the question of how it’s being paid for. Part of the guarantee is funded by scrapping green levies on energy bills, but this only slices £150 off bills. In return, it raises some interesting challenges for the government.

    Liz Truss said in her announcement, that part of the long-term solution to this crisis is for more investment in green energy. She also reaffirmed her Net Zero pledges. There’s the risk that removing levies intended to help fund a move to greener energy makes these things more difficult.

    There will be no additional windfall tax, so the lion’s share of the cost will be picked up by taxpayers. On the one hand, this is more reasonable than adding the cost to energy bills further down the line. That’s because it would’ve placed a disproportionate burden on those who are least able to pay. On the other hand, the prospect of tax rises is always a concern.

    We don’t know at this stage exactly how taxpayers will foot the bill. During the leadership campaign, Truss pledged no new taxes during this parliament. She could instead choose to use mechanisms like freezing tax thresholds and allowances, which could mean paying much more tax at a time of high inflation.

    Alternatively, the scale of the challenge could weaken the government’s commitment to tax cutting. It might well focus the minds of taxpayers, who need to consider whether they’re taking advantage of any allowances to protect themselves from the potential risk of higher taxes.

    If taxes do rise, we don’t know when this blow is likely to come, and whether we’ll be in a position to afford it when it does. Logically, given the freeze itself will last for two years, higher taxes to pay for it are less likely to materialise during that period.

    While energy prices might be forecast to fall back from the peak during this period, they’re likely to persist longer term. The Office for Budget Responsibility still expects them to be much higher than before the crisis at the end of its forecasting period in 2027. It means there’s a chance we’ll be asked to start paying higher taxes at a time when we’re still having to manage bigger energy bills.

    What about the demand side?

    One of the things Truss made clear in the announcement was that dealing with the short-term issue of a spike in energy costs was just part of the solution. She emphasised that building supplies was also key to making sure that this kind of crisis doesn’t happen again.

    For that, everything from extracting more fossil fuels to accelerated renewable energy and investments in nuclear would be essential.

    However, she didn’t talk about the other side of the supply and demand balance, and ways of reducing our energy consumption for the long term.

    A major part of cutting how much energy we use needs to be a revolution in insulation. The UK has incredibly inefficient housing stock, with older, draughty homes wasting a vast amount of energy. We need support in place that incentivises energy-efficient improvements for people who can afford it. But that also offers a solution for those on low incomes and in houses that are prohibitively expensive to insulate.

    While the energy-price freeze is very welcome, and will make a huge difference to millions of people, there are clearly questions that still need to be answered.

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      Important notes

      This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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