Britain borrows big again to ease energy shock

Britain’s new leader Liz Truss capped soaring consumer energy bills for two years on Thursday in a package to limit the economic shock of war in Ukraine that could cost the country more than 100 billion pounds ($115 billion).

With Britain facing a lengthy recession sparked by a near quadrupling of household energy bills, Truss set out what she described as bold and immediate action to protect consumers and businesses just three days after she took office.

“This is the moment to be bold, we are facing a global energy crisis, and there are no cost-free options,” she told parliament.

“We are supporting this country through this winter and next, and tackling the root causes of high prices so we are never in the same position again.”

She said new methods of supply would also be introduced, with a moratorium on fracking being dropped and new oil and gas exploration licences issued for the North Sea.

UK to set out $115 billion-plus plan to cut energy bills

“Energy policy over the past decade has not focused enough on securing supply,” Truss said.

She said average household energy bills would be held at around 2,500 pounds a year for two years, staving off the expected 80% leap that was due in October and that threatened the finances of millions of households and businesses.

With wholesale gas prices remaining highly volatile, the government did not put a price on the package but the support is expected to run into the tens of billions of pounds and will be funded by government borrowing.

Deutsche Bank has estimated that the energy price offset plus tax cuts that Truss has also promised could together cost 179 billion pounds, or about half the sum Britain spent on the COVID-19 pandemic.

Separately the Treasury and Bank of England will also address the extraordinary liquidity requirements faced by energy firms that Truss said would be worth 40 billion pounds.

Businesses will also be given support but with details to come at a later date.

The full cost will be given in a fiscal update by new finance minister Kwasi Kwarteng later this month.

SOARING PRICES

The scale of the plan, by a leader who had ruled out “handouts” during her campaign to succeed Boris Johnson, has rattled financial markets. The pound fell against the dollar on Wednesday to levels last hit in 1985. read more

Sterling rose by around half a cent against both the dollar and euro as Truss spoke, while Britain’s government bond market – which had fallen heavily in the weeks leading up to Thursday’s announcement – was steady.

European energy prices started to rise as the world emerged from COVID-19 lockdowns and then surged in February following Russia’s invasion of Ukraine.

Average prices for British households, which are set under a cap, jumped by 54% in April to 1,971 pounds and were due to leap 80% to 3,549 pounds a year in October.

The government expects the package to curb inflation by up to 5 percentage points. Consumer price inflation in Britain jumped to 10.1% in July, the highest since February 1982, and is forecast to rise to 13% in October.

While the new cap will soften the blow for millions of households it still poses a threat to those on limited incomes. An Office for National Statistics survey published in September showed more than four in 10 adults already found it very or somewhat difficult to afford energy bills.

Charities and consumer groups welcomed the move as providing immediate support while businesses said they needed more details.

The opposition Labour Party questioned why the package wasn’t partly funded by a windfall tax on the sector, and why more wasn’t being done to improve insulation.

Britain was a net exporter of energy from the late 1980s to 2004 following the development of North Sea oil and gas fields, but production steadily declined from a peak in 1999. The country is now a net importer of all main fuel types, government data shows, with 38% of the energy it used in 2021 imported.

To address supply over the longer term, the government will issue more than 100 oil and gas exploration licences in the North Sea and scrap a ban on fracking, allowing projects to go ahead if local communities agree.