Energy crises are expensive. The last one - caused by unexpected and prolonged energy bill rises following the Russian invasion of Ukraine - cost the government £44 billion and households still paid £3 billion more in higher bills in 2023. Domestic energy debt could reach £7 billion this year, caused in large part by the previous energy crisis. Another winter with expensive energy bills will only make that situation worse.

Now, due to the ongoing Iran war, we are heading into another winter of unusually high energy bills. As a result, some 1.7 million households have said they will not turn on their heating this winter amid fears of soaring bills and efforts to save money and 40% only plan to turn on the heating if they get too cold.

The UK government will need to take seriously the scale of the challenges households face in keeping warm this winter. In April we published a briefing on “how to respond to an energy crisis”. Drawing on that, here are four steps the UK government could take at the Budget and over this winter to address this problem.

The challenge facing the Treasury and the Department for Energy Security and Net Zero (DESNZ) is what they can do to meet the extent of the cost increases facing households. A response that’s too small means the Treasury risks further challenges in the future, through higher inflation, more household energy debt and deeper fuel poverty. All issues that are usually harder and more expensive to fix.

Expanding targeted energy bill support is one option that many in the industry have put forward. Supporters of targeted support like it because financial cushioning can be given directly to those most at risk of fuel poverty or facing health risks. Reportedly, the chancellor’s preferred solution is to increase the Warm Homes Discount - a £150 discount on energy bills offered to households on certain benefits - by a further £100. Based on current energy cost projections, this option is likely to be too limited in reach, meaning many households will still struggle to pay their heating bills this winter.

The challenge of expanding targeted bill support even further is that the required data infrastructure to easily and effectively target energy bill support like this does not currently exist, and likely couldn’t be available to the chancellor ahead of this winter. Even if effective targeting mechanisms were in place, they still carry political risk: how does the Treasury choose who gets support and who doesn’t? Any choice comes with a cliff edge that could be politically challenging.

Instead, the chancellor should focus on making energy more affordable for all households, in a way that also creates conditions to help the UK move away from volatile fossil fuels in the long term. We recommend they do this in four key ways.

The fact that another energy crisis has followed so soon after the one in 2022 suggests that was not a one-off event. Given the damage to the economy, the government’s fiscal position and people’s lives, any plans ministers have to support households in the short term should also help insulate the economy from future crises.

As the UK heads towards a challenging winter, this Budget is the right time to make fundamental changes to how energy bills are charged while creating breathing space on household bills. We recommend that the UK government implement the three measures below which would save the typical dual fuel household £98 per year under the (projected) January price cap. At the same time as creating breathing space on bills, these three actions also help to create the best conditions for more households to switch away from using gas to heat their homes. This is because they reduce the electricity-to-gas price ratio, a key indicator for the economics of running a heat pump versus a gas boiler.

Critically, abolishing the gas standing charge would be a progressive move, helping the poorest households most, whilst costing the Treasury nothing. We estimate that 84% of the poorest households would be better off, compared with only 23% of the wealthiest. Read our full analysis on this proposal here.

The typical annual energy bill is projected to increase by over £275 in January, and it could be 18 months before prices return to their current (already elevated compared with pre-Iran war) levels. When faced with similarly high prices in 2022, the UK government brought in caps on the amount that could be charged for electricity and gas - known as the Energy Price Guarantee (EPG). This was incredibly costly for the government at the time, absorbing £24 billion that would have otherwise fallen directly on households.

With so many asks on the public finances, the chancellor is understandably wary of another costly scheme like the EPG. A price stabiliser would subsidise the cost of gas when the retail price rises above current levels, but would also generate revenue when the price falls below that point in the future. This is a fiscally-balanced approach which offers the same protections as the EPG, but also pays for itself within the five-year window that matters so much to the Treasury.

Using the same methodology as the Office for Budget Responsibility (OBR), we have forecast gas prices out to 2032. On that basis we project that a gas price stabiliser would cost around £3.2 billion at the peak, but would pay this back by the summer of 2028.

There are few alternative options which can match the scale of the price stabiliser’s benefits - capping household gas bills, supporting electrification and remaining cost neutral in the long term - without having an exorbitant cost.

Taking our proposals in points one and two together, this would cost the Treasury an average of £1.3 billion extra over five years, although this would be highly dependent on future energy prices. Comparatively, the reported proposal to extend the Warm Homes Discount would cost the government £1 billion, but would be more limited in scale and reach.

Alongside any changes to the structure of Britain’s energy bills, the UK government should support consumers to use energy more efficiently. Reducing oil and gas use without compromising on comfort is key to our economic resilience and allows households to cushion themselves against the upcoming price increases. The government’s first port of call should also be to support consumers in reducing energy usage, while avoiding implementing policies that have an outsized impact on people’s daily lives.

There are many low- and zero-cost energy efficiency measures that households can take quickly. Governments across the UK should be forthright in promoting these measures to households through all channels possible. Zero cost actions that reduce energy bills include:

1. reduce the flow temperature on your combi boiler to 60°C
2. turn off the pre-heat facility on your boiler
3. turn down thermostatic radiator valves (TRVs) outside your living room by 1.5°C
4. reduce thermostat temperature to 19°C
5. close curtains at night to reduce heat loss
6. turn off your heating by the start of April

As Dhara Vyas, CEO of Energy UK, put it this week, energy security IS national security. In the longer term, helping households to electrify their heating systems so they’re no longer dependent on more volatile fossil fuels is the best thing the UK government can do to help household wallets.

The good news is that the economic conditions for households to switch to electric heating have never been better. This is owing to the positive steps the government has already taken - removing VAT and some levies off electricity bills - in combination with the fact that gas prices have risen more than electricity prices in the wake of the Iran war. Perversely, this energy crisis is showing exactly why we need to get off gas, but it’s also creating the right conditions to do something about it.

Our analysis shows that an electricity-to-gas price ratio of 2.9 or below would mean that a heat pump costs the same as a gas boiler over its lifetime, including installation and running costs. If the policy changes in step one were carried out, the economic conditions to switch to electric heating would be even better, reaching a price ratio of 2.59, shown below.

This is therefore the right time to press ahead with national plans to help households move from fossil fuels to electric heating. Over the autumn and winter, the UK government should move to deliver the Warm Homes Plan in full, at pace. This includes making progress on: the new scheme that will help low-income households electrify their home energy and heating systems; announcing the new consumer loan scheme; and setting up the new Warm Homes Agency.

Reports that the Boiler Upgrade Scheme - the backbone of the heat pump market in England and Wales - may be reduced only serve to slow down a market that is in growth, exactly when the wider conditions for the market to accelerate are in place. Turning away from this critical scheme now would leave the UK economy and people’s electricity bills at the mercy of the next global crisis, and punish many businesses and heating engineers who have followed the government’s direction to invest in cleaner heating.

Energy Secretary Miatta Fahnbulleh recently asserted how we must “electrify now.” Given the expected extent of this crisis, and the fact that it follows so soon after the last one, the Treasury and DESNZ’s best long-term defence is to help households reduce their reliance on volatile fossil fuels.

The four steps outlined in this plan would help meet the expected scale of the crisis. Restructuring bills and removing taxes would provide immediate relief and make electricity more competitive against gas. A gas price stabiliser would help to tackle the root cause of the crisis, at a cost that is paid back within the window the Treasury cares about. Clear, practical advice would help households cut their bills without sacrificing comfort while pressing ahead with the Warm Homes Plan would start to loosen gas’s grip on household budgets for good.

If you’re interested in learning more about any of these policy ideas, get in touch with our sustainable future mission policy team here: [email protected]