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Energy bills: 3 key questions about Labour’s £29bn price cap plan

·Finance Reporter, Yahoo Finance UK
·5-min read
energy bills EXETER, ENGLAND - AUGUST 15: Labour Party leader Sir Keir Starmer meets people at Park Life Heavitree community group cafe, to talk about Cost-Of-Living Crisis, on August 15, 2022 in Exeter, England. The Labour Party leader offered his proposal as the UK is experiencing rising inflation and a steep increase in the cost of gas and electricity. (Photo by Finnbarr Webster/Getty Images)
Cost of living: Keir Starmer vows to extend windfall tax to freeze family energy bills as he reveals Labour's 'emergency' plan to tackle crisis. Photo: Finnbarr Webster/Getty

Labour has pledged a new £29bn plan to stop people having to pay “a penny more” on fuel bills this winter but the Institute for Fiscal Studies (IFS) questioned how the support package will be funded, saying some of its proposals are an “illusion”.

Under the proposals, Labour would freeze the energy price cap at £1,971 for six months this winter, saving households £1,000.

It would be funded by extending a windfall tax on profits and dropping the £400 energy rebate brought in by the current government.

Labour leader Keir Starmer told BBC Radio 5 Live on Monday: “Millions of people are already struggling with their bills, we all know that across the country and the hikes that are expected for this October … from a price cap of just under about £2,000 to £3,500 and then £4,200 and millions of people, millions of families are saying ‘I just can’t afford that’.

“We have a choice and this is really the political choice of the day. We either allow oil and gas companies to go on making huge profits which is what’s happening at the moment or we do something about it.

Read more: Energy bills: Poorer UK households need to cut £1 in every £4 spent to afford to pay

“We, the Labour party, have said we’ll do something about it. We will stop those price rises and we will extend the windfall tax on the profits that the oil and gas companies didn’t expect to make. So we’ve got a very strong, robust, costed plan here which will stop those rises this autumn.”

How it will be funded?

Closing the “absurd” loopholes in the windfall tax introduced in the spring by then chancellor Rishi Sunak and backdating the levy to January, would raise £8bn, Labour said.

The rest of the price freeze would be paid for using the £14bn earmarked by the government for extra support to cover energy bill rises, and £7bn saved in debt interest payments through reduced inflation.

However, the Institute for Fiscal Studies (IFS) questioned Labour’s explanation as to how it would fund the support package.

IFS director Paul Johnson said the party’s plan to cancel the energy price cap rise — if extended from the proposed six months to a year — would be “looking at the cost of furlough.”

He told BBC Radio 4’s Today programme that it would be “true this year” that this would bring down inflation and interest on government debt payments, but warned the average rate of inflation would not change over time assuming it was only a temporary subsidy, “so that’s not a real saving … in the long run”.

Read more: UK needs £12bn more to support families amid cost of living crisis

Johnson warned that inflation would quickly pick up again once the subsidies ended, meaning the cost of servicing the debt would also increase.

He told The Daily Telegraph: “It’s an illusion in the sense that it will reduce interest debt payments in the short term but unless you maintain these kinds of subsidies permanently, it won’t reduce them in the long run. Inflation will be higher later on."

In response, Starmer told BBC Breakfast: “What Paul Johnson isn’t disputing is that our plan will reduce inflation…

“Of course what he’s rightly saying is what happens after April matters because you have to maintain measures to reduce inflation.”

Asked about the potential length of the freeze, he said the situation would have to be assessed in April according to the forecasts.

The energy price cap, the maximum amount companies can charge, is currently set at £1,971 a year — but it is expected to climb to almost £3,600 a year in October and over £4,200 in January.

Energy bills are set to soar
Energy bills are set to soar. Chart: Yahoo

Is nationalisation on the table?

The leftwing campaign organisation Momentum called on Labour to add the nationalisation of energy to its proposals.

But Starmer ruled out nationalising energy companies, a plan proposed by the former prime minister Gordon Brown who suggested the government should consider it as a temporary measure.

"If you go down the nationalisation route, then money has to be spent on compensating shareholders," Starmer told BBC Breakfast.

Read more: Energy bills set to cost more than two months’ wages next year, warns TUC

Momentum highlighted that the Trades Union Congress (TUC) estimates that nationalising energy would cost £2.85bn, while Labour’s policy would see £29bn spent subsidising energy companies.

The End Fuel Poverty Coalition — a group of around 60 charities and civil society groups — welcomed Labour’s plan, but insisted that extra financial support would still be needed for those already struggling with increased bills.

Liberal Democrat leader Sir Ed Davey — who proposed an energy price cap freeze a week ago — mocked the timing of Labour’s policy: “Glad you liked my proposal to cancel the energy price rise."

Would I still receive my £400 rebate?

The Labour leader said his party would not go ahead with the £400 rebate on energy bills which the government has promised all households in October, saying: “We’re not going to let the price go up in the first place and so that’s how the £400 is catered for.

“Whilst we’re cancelling parts of the government’s approach so far, the bit we’re not cancelling is the £650 to pensioners and those on universal credit, so that is targeted support we would keep.”

Starmer said Labour was also committed to measures to increase the UK’s energy security, doubling onshore and offshore wind capacity, investing in solar, tidal and hydrogen, and bringing forward new nuclear capacity.

Watch: Why are gas prices rising?