What Liz Truss’s £150bn energy plan means for household finances

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, commented:

“Britons will be breathing a collective sigh of relief following Liz Truss’s decision to freeze annual energy bills at £2,500 for the typical household this winter and next. Households were bracing their finances for an 80% hike in their energy bills from October 1 with the more vulnerable resigning themselves to a long winter with little or no heating because they simply could not afford such an astronomical rise.

“While £2,500 is over £1,000 less than Ofgem’s energy price cap of £3549, set to come into force on October 1, it is still 23% more than the current level of £1,971. However, with the £400 rebate on top, it means bills will remain around their current level – but that does not take away all the pain for consumers. Energy prices are still significantly higher than they were a year ago, with some households already struggling to absorb the rising costs and food prices are high too. It means household budgets are not completely out of the woods yet.

“Plus, it is also wise to remember the price cap is not a cap on the maximum bill a household can be charged as what you pay depends on your usage. This means that those using more energy than average will pay higher bills and those using less will pay less, so not everyone is looking at the same bills.

“With inflation standing at 10.1% and expected to trend higher next month, households are already grappling with higher food bills along with rising costs for all the other goods and services they consume. Add in falling real incomes as inflation erodes the value of take-home pay and it’s vital that Britons continue to adopt a more frugal approach to life this winter if they want to avoid taking on debt.

“But Truss’s plan of action goes a long way towards taking fear out of the equation – fear that life will simply become unaffordable in the face of soaring energy prices and fear that jobs will be put at risk because businesses won’t be able to afford to keep the lights on. It also removes the uncertainty over what lies ahead for the economy – with expectations that inflation will now peak next month at a more modest figure rather than the dizzying highs in excess of 22% expected early next year.

“While the Bank of England has said Truss’ energy bill bailout may not prevent it from increasing the base rate at next week’s meeting, it does expect runaway inflation to be contained. This offers hope that the country is potentially looking at a much milder recession at the end of the year than the more severe downturn some were expecting.

“The new assurances for businesses that energy costs will be capped at the same price per unit as households for six months will hopefully ensure companies can continue to operate throughout the window and aren’t forced to shut up shop – a move that protects jobs and livelihoods. However, what happens after the end of the six months is unclear, as only “vulnerable sectors” are likely to benefit from then.

“There is also good news for the 1 million UK homes with an oil-fired heating system that previously received no protection against rising prices. Average home heating oil is currently around 98.67 pence per litre, as of September 7, much lower than the almost 170 pence rate seen in March. But prices are still double what they were a year ago and volatility is still very much a feature in global oil markets and the strong Dollar is also affecting oil import costs in Sterling. So, the new plan to set up a support fund for the vulnerable that rely on oil to heat their homes means they now have a slightly less uncertain winter ahead. However, it is unclear how consumers can access this fund.”