Ministers are discussing the possibility of intervening to protect the public against soaring household energy bills if the Middle East conflict drags on.
Oil and gas prices have surged since Donald Trump started his bombing campaign against Iran, which has hit back by closing off a crucial shipping route through the strait of Hormuz, and attacking energy infrastructure.
Household energy bills are fixed until July, when the energy price cap is next set by the regulator, Ofgem. Forecasts suggest it could then rise by 10%, adding £160 a year to the average bill.
The energy secretary, Ed Miliband, is understood to believe that prices cannot to be allowed to rise substantially, just as the government is able to claim that it has lowered bills due to decisions taken at the last budget.
One source at the energy department said: “Driving down bills is one of our core cost of living messages. We can’t allow them to go back up, even if it involves more support for households. We hope the situation in the Middle East settles but we’re planning for all eventualities.”
Another minister, asked what the government would do if bills went up sharply this July, said: “That can’t happen.”
Treasury sources said any discussion about mitigation was premature, but acknowledged it would have to be on the table if the conflict was prolonged.
Analysis by the Resolution Foundation earlier this week suggested an energy shock could more than wipe out expected gains in living standards this year.
In her spring forecast speech on Tuesday, the chancellor, Rachel Reeves, promised to “protect families from the turbulence that we see beyond our borders”. She said that when governments lose control of the economy, people feel it “in their pay packets, in their bills and in their mortgages” – contrasting that with Labour’s approach.
As well as driving up energy bills, rising oil and gas prices have also caused markets to dial down expectations for interest rate cuts by the Bank of England – another way Labour had hoped households would start to feel better off.
Energy providers are already starting to alter their fixed price tariffs, according to industry figures. According to MoneySuperMarket, 57 fixed price tariffs have already been removed or updated in the last 72 hours.
One frontbench MP said: “If we can suddenly find £10bn because the always-wrong OBR changed their mind last November, we can find £10bn to get people’s bills down today.”
Another junior minister said: “I don’t think it would be credible for us to say people have to absorb the costs when even Liz Truss did not allow that to happen.”
However, experts are already warning the government against an across-the-board rescue package of the kind launched by Truss in autumn 2022 – after Russia launched its invasion of Ukraine – at a cost of more than £30bn over two years.
“This kind of government support is a key reason that debt has been rising in recent years,” said Helen Miller, director of the Institute for Fiscal Studies (IFS). She urged ministers to “try to target help to where it’s most needed”.
Similarly, the Resolution Foundation said a fresh energy price shock would increase the urgency of its call for a “social tariff” that provides cheaper energy for the poorest households.
The Labour MP Graeme Downie, a member of the Energy Security and Net Zero select committee, said the government had to show it was being proactive. “The government has done the hard yards investing in infrastructure, beginning to secure the UK’s energy future and control costs for businesses and households, but there is a real risk that unless we firmly point the finger of blame for rises in energy costs where it belongs – with Iranian actions – and prepare to intervene to support ordinary people, there is a risk the public turn on the government for something that is not their fault.”
Sam Alvis, associate director for environment and energy security at the IPPR thinktank, said: “There are limited actions government has to materially reduce energy prices for people, and none of them are free. But given both the direct inflation benefits of acting on energy prices, and cost of living being the public’s number one priority before the war in Iran, there are few more important ways to spend spare fiscal space now.”
“There are three ways government could help households: first increasing access to solar, batteries or EVs that insulate households from rising gas prices. Second, we pay for lots of things through charges on energy bills – government has already moved some of those to general spending, moving more particularly new infrastructure costs would be fairer. Third, potentially increasing the warm home discount to support the most vulnerable – but again that currently comes as a cost on bills.”
If a drawn-out conflict leads to a long period of high energy prices, Reeves is also likely to come under pressure to cancel the planned increase in petrol duty due in September – something the Liberal Democrats have already demanded.
The 1p a litre rise, announced in the November budget, is meant to be followed by another 2p increase in December, and 2p next March – reversing a cut made by Boris Johnson’s government in 2022 after Russia’s invasion of Ukraine.
