£110bn needed to cover energy bill rises over next year, study finds

The government would need to spend more than £110bn to cover almost all of Britons’ extra energy costs over the next year, a new report by Institute for Government (IfG) has found.

It would cost £23bn to cover October’s energy price cap hike, according to the think tank – with the average household set to spend £900 more on energy this autumn than was expected only three months ago.

Extending support to ease the pain of soaring bills next year would cost another £90bn, the IfG said, raising the prospect of “substantial” spending during the cost of living crisis.

Tory leadership candidates Liz Truss and Rishi Sunak have rejected the Labour’s proposal to freeze energy bills for six months. Only Sunak has committed to any extra support payments for the most vulnerable.

However, Treasury is said to be looking at range of options to present to the next PM – including a proposal by the big energy firms for a fund allowing them to freeze bills for two years and pay it back over 15 to 20 years.

Scottish Power’s chief executive Keith Anderson has said the plan for a state-backed loan scheme – in which energy firms could draw from commercial banks – could cost around £100bn and was being “seriously considered” by the government.

Sources close to the energy company told The Independent that business secretary Kwasi Kwarteng – a Truss backer tipped to be the next chancellor – was receptive to the idea at last week’s meeting with Mr Anderson.

But sources close to Kwarteng would not be drawn on his level of enthusiasm – saying it would be up to the next PM to decide whether to take the idea forward.

Sunak – who has suggested he would commit an extra £5bn in support payments to the most vulnerable – attacked Truss’ plans at last night’s Tory hustings. He said it would be a “moral failure” that risked “pushing literally millions of people” into destitution.

However, the new IfG report found that plans offered by Truss and Sunak will make only “a small dent” in the soaring energy costs faced by families this winter.

The think tank said it would require £23bn this autumn is the new government wanted to offset almost 90 per cent of bill increases this financial year – as was the case with the packed package announced by then-chancellor Sunak in May.

“The new prime minister will need to be ready to provide further support again,” the report warned. “Offsetting the same proportion of bills next year would cost around £90bn.”

Labour has called for a price cap freeze in the six-month period, keeping the figure at its current level of £1,971 a year – a plan rejected by both Truss and Sunak, who claim it would be poorly targeted.

The IfG found Labour’s plan would cost more than £40bn for the period until next April, and would be difficult to reverse.

Defence minister James Heappey – a Truss backer – also dismissed the £100bn Scottish Power deficit fund plan to freeze bills, as he defended her immediate focus on cutting taxes and reported preference for more “targeted” support.

“These are eye-watering amounts of money,” Heappey told Sky News on the idea of a deficit fund. “I don’t think a universal freezing of everybody’s energy bills really helps to get taxpayers money to people who need it most.”

Iain Conn, the former chief executive of Centrica, said he supported Scottish Power’s deficit fund plan – also backed by trade body Energy UK. He said “something has to be done and done quickly” with the UK “facing a national crisis”.

He told BBC Radio 4’s Today programme: “The magnitude and pace of price rises are simply impossible for customers, whether they are individuals or businesses, to plan for, manage and afford.”

Annual energy prices are tipped by Cornwall Insight to rise to £4,650 from January, while consultancy firm Auxilione estimated that bills could hit £6,552 for the average household from April.

Olly Bartrum, senior economist at the IfG, said: “Deciding whether and how to help households and businesses with these costs will be one of the most urgent tasks facing the new government.”

He added: “This may require substantial extra spending this winter and even more again next year – even limiting help to the most vulnerable could cost several billion pounds.”

The IfG said the government should do more to “encourage” greater energy efficiency as well as reforming energy markets to reduce vulnerability to high prices.