Keir Starmer is taking a dangerous bet on the energy market

·4 min read
keir starmer - Jane Barlow/PA Wire
keir starmer - Jane Barlow/PA Wire

Sir Keir Starmer has laid out Labour’s plans to tackle soaring energy bills by freezing the price cap at its current level of £1,971 a year for six months from October.

The Labour leader said the £29bn proposal would bring inflation down, which he said “benefits everybody”. A typical family would save around £1,000 from the freeze, he claimed.

However, the Labour leader risks committing to an increasingly expensive policy if natural gas prices continue to creep higher.

Labour’s intervention raises the pressure on Liz Truss and Rishi Sunak – the two Conservative leadership candidates – to flesh out their own plans.

Here’s how the policy would be paid for, and what effect it could have.

What is Labour’s plan?

Under Labour’s plan, the energy price cap set by regulator Ofgem would be frozen at its current level of £1,971.

As things stand, the cap – which dictates the maximum households have to pay for energy – is poised to rise about 80pc, to around £3,600, in October. The increase is a result of soaring natural gas prices, partially a result of Russia's invasion of Ukraine.

The freeze would remain in place for six months, lasting until April 2023, at which point a major increase in the cap is likely. An estimate by energy consultancy Auxilione says the price cap will rise to £5,264 at that point – a 167pc increase on the ‘frozen’ rate.

Sir Keir has said Labour would decide what to do about that closer to the time. This is perhaps the biggest danger to the policy – that Labour is committing itself to either long-term support, or the possibility of a searing increase in the future.

How much will the freeze cost?

The headline cost of the policy is £29bn. This is the price of paying energy companies (who still have to pay ultra-high wholesale prices) for the shortfall between frozen bill levels and what they would have otherwise received.

To put that in context, it’s less than the £30bn Conservative leadership frontrunner Liz Truss says her tax cuts would cost, and equivalent to about two-fifths of the pandemic furlough scheme.

Sir Keir says the plan would be “fully funded”, partially by extending the windfall tax of oil and gas companies to raise a further £8bn; by ditching current policy to pay £400 to all households to help them cover October’s price rise, worth about £14bn; and – by reducing inflation – cutting the amount of interest the Government has to pay on debt, roughly £7.2bn.

Who will it help?

Labour estimates the policy will save a typical household £1,000. This figure is the estimated gap between how much households will pay at the £1,971 cap, and how much they would have paid if prices had risen in line with predictions.

It’s more plausible than the Liberal Democrats' claim – part of a similar freeze proposal – that families and pensioners would save £1,600 from cancelling the October increase. That number is the raw difference between the April 2022 and October 2022 caps, and fails to take into account further changes.

Labour says the policy would provide the greatest help to poorer and more vulnerable households, who typically spend more of their income on energy bills. However, everyone who uses a reasonable amount of energy likely stands to benefit.

The policy also looks to provide further benefit to second-home owners, a catch that was also apparent in Rishi Sunak’s £400 subsidy plan.

Will it reduce inflation?

The short answer is: yes, probably. Soaring energy bills have been the key driver of inflation in the UK, which currently stands at a 40-year high.

In June, when consumer prices were 9.4pc higher year-on-year, the largest contribution to the increase was from housing costs that include electricity and gas, according to the Office for National Statistics.

The Bank of England is predicting year-on-year inflation could accelerate to 13pc in October as the new price cap kicks in, and the Resolution Foundation think-tank sees 15pc inflation in early 2023. Both see the influence of soaring natural gas prices on the price cap as a key factor.

Freezing the cap (and therefore the price paid by households for energy) will reduce inflation. Speaking to BBC Radio 4’s Today programme this morning, Sir Keir said: “One of the benefits of our proposal is that it brings inflation down, which benefits everybody, but particularly those who are most vulnerable, and those who are least well off.”

That’s a bit of a circular argument: it’s like saying ‘one of the benefits of our package to bring inflation down is that it brings inflation down’.

However, lower overall price rises may have the effect of reducing pressure elsewhere – particularly at a time where workers are growing increasingly frustrated with below-inflation pay rises.