The UK Government is due to announce its plan for tackling the energy crisis this week. There have been a number of ideas floated in recent days, including a loan fund that would be paid back by energy customers, as well as price controls on wholesale gas.

It now seems likely that the government will go with a more straightforward policy: capping energy prices at roughly their current level, borrowing money to pay for it. Within that plan, though, there are a lot of details still to be announced and lots of issues for government to tackle. This blog looks at the key issues the support plan needs to tackle and the options for doing so.

1. Provide support for households, especially the most vulnerable

It is clear that the proposed October price cap – with energy bills reaching £3,600 for the average household – would have inflicted deep pain on most people in the UK. In this context, large-scale government support is the right thing to do.

However, not all households are equal, both in terms of their income and their energy use. For many lower income households, especially those that live in leakier homes or need higher temperatures to manage health conditions, energy bills are already extremely painful. Freezing energy bills may stop the pain getting worse, but it won’t make things any better. The Government should consider increasing the targeted support payments it announced in May, and also focus particular effort on boosting energy efficiency for low-income households that have high energy use.

2. Enable small businesses to survive

It is not just households that are at risk from the energy crisis; many businesses, especially energy-intensive industries and hospitality businesses, are also at risk of insolvency due to higher energy costs. Businesses are currently outside the Ofgem price cap and so have been even more exposed to the rising cost of gas.

The Government’s support package needs to ensure businesses aren’t pushed into bankruptcy by high energy prices. It may be tempting to target support at certain industries or sectors but in practice this is likely to be very challenging and may have an unintended impact on the structure of the economy. The most obvious measure would be to extend the price freeze to all businesses – or perhaps limit it to small businesses only.

3. Avert a deep recession while controlling inflation

Without government action, a deep recession would be inevitable, with households cutting back heavily on discretionary spending and many businesses ceasing to trade. But even with support in place, the economic picture is likely to be complicated by the very high inflation the UK is already experiencing.

One advantage of the energy price freeze is that it will likely reduce the growth in the headline rate of Consumer Price Index inflation. Because inflation is calculated based on the prices consumers, not governments, pay, freezing the price will slow inflation. However, injecting so much extra government borrowing into the economy could also push up demand, which may cause inflation (and therefore interest rates) to rise.

4. Keep government borrowing sustainable

More seriously, the level of support required is going to be very expensive and the Government must ensure it can afford the bill in the medium term. Government borrowing has become more challenging in recent months, with high inflation and rising interest rates increasing the cost of borrowing. In this environment, borrowing tens or even hundreds of billions of pounds more is risky.

The price freeze is a particularly risky option in this respect. It is an open-ended commitment, with no ceiling on the price it will have to pay, and that would be hard to end until gas prices have fallen. If energy prices remain high for more than two or three years, the government could find itself facing rising interest rates and inflation, plus a rapidly weakening currency.

The best way to reduce this risk is to reduce gas use. The less gas we all use, the less the government will have to borrow to subsidise it. That means Her Majesty’s Treasury will have quite a strong incentive to invest in measures that save energy.

5. Reduce gas use

In the medium term, reducing gas use is the single most important thing we can do to help the UK economy. Because we import around 60% of our gas, a big chunk of our energy bills go straight out of the UK economy – adding to the problems it creates for government borrowing.

One of the downsides of an energy price freeze is that it weakens the incentive for us to use less gas. Richer households, which generally have more scope to cut back, would be much more likely to reduce usage if their bills were £6,000 than £2,000. Why cut back if you’re not paying for it?

As a result, the UK government will have to take much more action itself to promote energy efficiency. It will need to rely on a degree of social solidarity – of the kind we displayed during the start of the Covid pandemic – to ask people to optimise their boilers and avoid wasting energy. Government should also invest hugely and urgently in measures such as insulation, solar panels and heat pumps, all of which will save it money. The longer we leave it, the more we’ll pay.