Yahoo Finance Energy price cap freeze will do nothing to help the millions who are already struggling
This could be the only freeze we’re delighted to see this winter. The energy price cap guarantee will make a profound difference to millions of people who were facing the prospect of impossible energy bills.
However, the level it has been frozen at means there’s no respite for those who are already facing an uphill struggle to pay their bills.
Energy prices will be fixed at a maximum of £2,500 a year for the next two years, which is a big reduction on the proposed October price cap of £3,549.
It’s a relief for anyone who is just-about keeping on top of their bills right now, but was losing sleep over how they could continue to do so this winter.
There was also great news for those who heat their home with oil, anyone living in park homes and people using heat networks. They aren’t protected by the cap and were facing ruinously high price rises, but now they have been promised equivalent support.
The cap is frozen at a higher level than we have right now, but once the £400 payments being made to every household are factored in, prices should be roughly similar this winter. The problem comes, of course, when these payments run dry. Prices aren’t forecast to have backed off by then, so either more payments will need to be made, or we’ll all have to wrestle with higher prices.
Read more: Energy bills: Liz Truss caps gas and electricity prices at £2,500
The freeze will do nothing to help the millions of people who are already struggling. Figures from the Office for National Statistics show that 45% of people are already finding paying their energy bills either somewhat difficult or very difficult.
Citizens Advice says that two people a minute are turning to the charity for crisis support, through foodbank vouchers or charitable donations — and that’s in the summer, when people on pre-payment meters are paying for far less energy. As energy needs spike, vulnerable people on these meters face horrendous challenges.
There are plenty of people who have only been able to pay the bills by going into debt. One in five are borrowing more than they did this time last year, and they will eventually hit a wall — where their repayments are unaffordable or they exhaust their credit limit. For these people, a freeze at this level isn’t enough to protect them from a looming crisis.
During the debate in parliament, new prime minister Liz Truss was pushed on whether there would be additional help for those who need it most. However, she simply referred back to the lump sum cost of living payments coming this autumn and winter to state pensioners, those on means-tested benefits and people with disabilities.
These are certainly welcome, but they won’t necessarily go as far as the government hopes.
Read more: Liz Truss's energy bills price cap freeze: What does it mean for me?
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. People have been running up debts and putting off vital purchases, so it’s not necessarily enough to offset the higher cost of energy this winter.
There’s also the question of how it is being paid for. Green levies on energy bills will be suspended to support the freeze, with the Institute for Fiscal Studies (IFS) estimating it will cut bills by an average of £50 this winter.
However, it raises some difficult questions. Given that one of the long-term solutions to this crisis is for more investment in green energy, and given Liz Truss has committed to existing Net Zero pledges, removing a big chunk of the money available to power the transition to renewables is going to make the process much harder.
It looks as though the rest will be paid for through general taxation. The fact the government rejected a suggestion to fund it through higher energy bills in future will come as a relief to those on lower incomes, because it would have placed a disproportionate burden on those who are least able to pay.
Of course, nobody is going to be delighted by the prospect of paying higher tax in future, but at least a progressive tax doesn’t risk compounding problems for the lowest earners.
Read more: How buy now, pay later could damage your credit rating
For taxpayers, the question will be how the money is repaid, where it will hit, how hard, and what they can do to protect themselves.
We know that the freeze itself will last for two years, so higher taxes are unlikely to materialise during that period.
However, higher energy prices are likely to persist, and while they won’t be at such eye-watering levels in two years’ time, the Office for Budget Responsibility said they’d still be significantly higher at the end of its forecasting period in 2027.
The question then becomes whether we will have to pick up the tab at a time when our energy bills are still horribly expensive.
The decision not to add more windfall taxes for energy companies is a controversial one. There will be plenty of taxpayers who feel they will be shouldering the burden of paying for this help alone, when the energy companies have broader shoulders.
Truss believes that this tax would put companies off investing in the UK — and investing in renewable energy that will provide part of the long-term solution to the problem. If that investment isn’t forthcoming, it remains to be seen whether this belief will still hold sway.
Read more: What the new chancellor should do to help struggling households
There was some talk about accelerating developments in renewable energy as part of a wider plan to boost energy supplies to prevent this happening again in future.
However, there was a deafening silence on another area that needs to be part of the long-term solution — insulation.
The UK has incredibly inefficient housing stock, with draughty, poorly insulated homes wasting a vast amount of the energy we pour into them. A complete solution therefore requires a revolution in insulation. That’s not just incentives for those who can afford to make changes, but a sensible solution for those on low incomes and in houses that are hard to cost-effectively insulate too.
While the energy price freeze is very welcome, and will make a huge difference to millions of people, there’s clearly more to be done. For anyone already facing an uphill struggle to pay their bills, today’s announcement will be a disappointment.
A freeze does help, but without more targeted support for those who need it most, it will simply slow the pace at which things get much, much worse.
Watch: Liz truss energy bills freeze will be worse for struggling families, say Lib Dems
Sarah Coles is a personal finance analyst at Hargreaves Lansdown and co-presents Switch Your Money On podcast.
