Treasury looking at U-turn on planned cut to UK energy subsidies

Chancellor Jeremy Hunt is examining plans to protect millions of British families from a looming spike in their monthly energy bills by reversing a planned cut in subsidies.

The government said in November it would reduce the level of support it has provided under the “energy price guarantee” from April, which would lift the cap on an average households bill from £2,500 to £3,000 a year.

Until now the Treasury has resisted pressure to keep the guarantee at £2,500, despite warnings from poverty campaigners the imminent cut in support would leave millions more households struggling to pay their bills.

However, on Tuesday government officials confirmed that plans to lift the threshold from April was “under review” and could be dropped in the Budget in two weeks time. “At present there is no plan to change the policy in the Budget but there could be,” said one official.

A Downing Street spokesperson confirmed that the policy was being re-examined: “All I would say on this is it’s something we are just keeping under review.”

Treasury officials had previously played down expectations of a U-turn with Hunt warning that the improved situation in the public finances could still deteriorate given the volatile economic climate.

Last week the Office for National Statistic announced that the government’s borrowing figures were on track to come in £30bn lower than previously expected for the year, raising expectations that Hunt could deliver some spending surprises in the Budget on March 15.

Campaigners argue the government has money to spare because the fall in wholesale energy prices meant the cost of the original intervention on energy bills had come in lower than forecast.

Cornwall Insight, a consultancy, estimated last week that the additional cost to the government of freezing bills at £2,500 between April and June would now be around £2.5bn, or less than 10 per cent of the full cost of the price guarantee scheme.

Citizens Advice warned this week that the number of households in fuel poverty would double from April if average bills rose to around £3,000. The pressure is expected to ease in the second half of the year as lower wholesale gas prices feed through into lower bills.

Energy regulator Ofgem is expected to lower the separate “price cap”, which usually governs the level of household bills and currently defines the level of subsidy the government pays above the guarantee, towards £2,100 from June.

At that point households with average usage would switch to paying the lower amount and eliminate the need for the subsidy, unless energy prices rebound. The higher £3,000 price guarantee was originally meant to be in place until March 2024.

Grant Shapps, the energy secretary, said he was “very sympathetic” to those seeking to freeze the threshold at its current level. “The chancellor and I are working very hard on it,” he told The Times.

Energy suppliers, who must inform customers of price increases 30 days in advance, are set to send out letters alerting households to the increase in bills in the coming days.

One industry contact close to discussions with the government said they were pushing the Treasury to make a decision prior to the Budget so they could avoid worrying vulnerable customers by telling them their bills were going up only to have to reverse course two weeks later.

Consumer champion Martin Lewis warned this week that it would be “an act of national mental health harm” to raise bills just for three months when they have already doubled in the past year.