U.K. Gives Itself 3 Months to Find Fix for Energy Price Rise

(Bloomberg) --

The U.K. government is giving itself until April to find a solution to soaring gas prices since that's when consumers would start feeling the bite of a new cap on utility bills.

Energy regulator Ofgem is due to announce a new limit for some tariffs on Feb. 7, but ministers believe they have a couple more months to gauge whether any assistance is needed to help alleviate the impact, according to a person familiar with the matter who asked not to be identified because the discussions are private.

Business Secretary Kwasi Kwarteng met with utility bosses Wednesday. The measures under discussion include an industry proposal for loans to help suppliers delay some of the April increase, expanding funding measures aimed at low-income households as well as cuts to the Value Added Tax charged on bills.

At the meeting “there was discussion on how to build a stronger, more resilient energy market to ensure consumers are protected into the future,” a government spokesperson said. “We'll continue to listen to consumers and businesses on how to manage the costs of energy.”

Wholesale power and gas prices have recently shot to record levels, stoking higher inflation and a cost-of-living crisis throughout Europe. In the U.K., consumer groups and charities are asking politicians to provide some relief, with reports of low-income customers having to choose between paying for heat or buying food.

The Resolution Foundation said last month that 2022 is set to be a “year of the squeeze” on household budgets as wages stall, taxes rise and prices surge. Working families face a 1,200 pound-a-year ($1,630) hit starting in April, it estimated.

On Sunday, 20 Conservative members of Parliament wrote a letter to the Telegraph appealing to Prime Minister Boris Johnson and Chancellor of the Exchequer Rishi Sunak to remove the 5% VAT charged on energy bills, as well as the environmental levies they say make up almost a quarter of electricity bills.

“We have almost uniquely caused our energy prices, through taxation and environmental levies, to increase faster than those of any other competitive country,” the MPs wrote. “High energy prices, whether for domestic heating or for domestic transport, are felt most painfully by the lowest paid.”

Cutting VAT would benefit all households, even those who can afford the higher bills. There are calls from energy companies, including Electricite de France SA and Iberdrola SA's Scottish Power, for the government to focus relief on the poorest households.

Energy Crisis Prompts Calls for U.K. to Reduce Tax on Bills

Johnson argued during the Brexit campaign that leaving the European Union would allow the U.K. to remove the VAT from energy bills. But on Tuesday, he appeared to back away from that position, telling a news conference that a VAT cut is “a bit of a blunt instrument” that would mean “also cutting fuel bills for a lot of people who perhaps don't need the support.”

The government will “listen to businesses and consumers,” and Sunak is “very, very mindful of the increase in energy prices and the effect of increasing energy prices on people up and down this country,” Johnson said.

Another option would be to expand the number of households that qualify for government support like the Warm Home Discount for low-income households, Winter Fuel Payments for pensioners and the Household Support Fund for vulnerable people.

The extraordinary surge in prices, with gas up more than 300% from a year ago, has been exacerbated by the collapse of two dozen smaller energy suppliers, with their customers being transferred to other companies and the costs spread across the industry.

Ofgem is consulting on ways to stagger those extra charges over several years to give some relief to supplier balance sheets. Funding would be provided by a bank so the costs wouldn't immediately be added to consumer bills.