Liz Truss has announced that typical household energy bills will be capped for the next two years at £2,500 while unveiling plans to cut wholesale electricity costs by moving nuclear and renewable generators onto Contracts for Difference.

The prime minister also revealed that the government is offering a £40 billion package of loans to support the liquidity of companies trading on the wholesale market.

She additionally used her statement in the House of Commons to announce twin reviews of energy regulation and of the UK’s delivery strategy for net zero to ensure it is “pro-growth”.

The centrepiece of the package is an Energy Price Guarantee (EPG) which will apply from the beginning of October when Ofgem’s new energy price cap level of £3,549 was due to come in and will discount the unit cost for gas and electricity use.

Truss told MPs that the typical household will pay no more than £2,500 per annum for each of the next two years. She claimed that this guarantee, which is in addition to the £400 already promised this winter through the Energy Bill Support Scheme, would save households £1,000 a year.

Schemes previously funded by green levies, which will be suspended in line with Truss’ pledge during her Conservative party leadership campaign, will continue to be funded by the government during this two-year period.

The same level of support will be made available to households in Northern Ireland, who are not covered by Ofgem’s price cap, with help also due to be delivered to customers reliant on oil and heat networks for keeping warm.

There will also be an “equivalent” guarantee over the six months to all business, charities and public sector organisations to help with energy costs this winter. After this point the government will provide “ongoing, focused support for vulnerable industries”, with a review in three months’ time to consider where this should be targeted to make sure those most in need get support.

Under the scheme, the government has said energy suppliers will be paid the difference between the frozen price and what energy retailers would charge their customers were this not in place.

The prime minister also announced that nuclear and renewable generators will be moved onto Contracts for Difference to “end the situation where electricity prices are set by the marginal price of gas”.

“This means generators will receive a fair price, reflecting their cost of production, further bringing down the cost of this generation.”

Truss said that she remains “completely committed” to the UK’s statutory goal to cut emissions to net zero by 2050.

However, she said that she has commissioned former energy minister Chris Skidmore to ensure that this target is delivered in a “pro-growth” way by 2050 without placing undue burdens on businesses or consumers.

This would run alongside a review of energy regulation that will set out “fix underlying problems” in the energy market and develop a “new approach” to “address supply and affordability for the long term”.

The recommendations from this review will set out “fundamental reforms” to the structure and regulation of energy market.

In addition, Rees-Mogg has been charged with setting out a plan over the next two months for how to achieve a “new ambition”, announced by Truss, for the UK to be become a net exporter of energy by 2040.

The statement also includes an announcement that the Treasury and the Bank of England are launching a joint scheme worth up to £40 billion to address the “extraordinary” liquidity requirements faced by firms operating in the UK wholesale gas and electricity markets.

The Energy Markets Financing Scheme will provide short term financial support for companies struggling with cash flow as they buy and sell.

Truss gave no indication on the cost of the package, which has been estimated at around £150 billion, saying the chancellor of the exchequer would give more details later in the month.

Under the government’s plans licensing of new North Sea oil and gas projects will be accelerated and a moratorium on fracking for shale gas will be lifted if affected communities are supportive.

Reaction

Keith Anderson, chief executive of ScottishPower: “This is decisive action from the prime minister and chancellor and will offer relief for worried billpayers ahead of winter. There is no denying the scale of this crisis has struck fear in the heart of families across the UK and Liz Truss and her team have moved fast with a package of support that offers certainty for longer on energy prices.

“Now we have an immediate solution for households the energy industry needs to lead a three-pronged attack to tackle the issue at source by weaning the country off fossil fuels, doubling down on cheap, clean renewables and, importantly, decoupling electricity prices from gas.

“We will work closely with the new Secretary of State and the Energy Taskforce to take forward the market reforms needed for the future.”

Michael Lewis, chief executive of Eon UK:  “We welcome today’s announcement, which goes a very long way to mitigating the worst impacts of a cost-of-living crisis that would have left thousands, if not millions, of homes and businesses struggling with bills this winter and into next year.

“All of our resources are being used to help customers get through the challenge we all face, and we have worked relentlessly to ensure the full extent of this crisis is understood by government. We’re pleased to see this government has listened, understood and intervened with speed and on a scale to match the severity of the crisis.

“I welcome the ongoing commitment to a zero-carbon economy by 2050 but I’m disappointed not to see a greater commitment to energy efficiency as a long-term solution to the current crisis, and as the foundation stone of that cleaner, greener future. The only way to insulate Britain from this kind of crisis in future is to improve our homes and dramatically reduce our fossil fuel use, and I will continue to urge the government to do much more to deliver an energy efficiency transformation of our housing.”

Dhara Vyas, director of advocacy at Energy UK, also welcomed the government’s intervention, saying it would ease customer worries but also adding that suppliers were mindful of ongoing pressures on household bills and ready to provide support. She also praised the measures helping businesses and off-gas grid customers.

She added: “Our members will now be working closely with Government on the details of the scheme in order to implement the new price cap level as quickly as possible and communicate it to their customers. Wholesale gas prices are likely to remain high for some time so we need to be prepared for this support to be in place over the next year, and there needs to be a clear exit strategy from Government.

“This means focusing on what we can do to bring the cost of energy down for customers over the longer term, and the best way to do this is by expanding our sources of clean, domestic power like wind and solar – as the quickest and proven route to energy security and lower bills – and by making our homes and buildings energy efficient. This must be accompanied with reform to create a market that allow consumers to benefit fully from the low cost of clean generation.”

Darren Jones, chair of the Business, Energy and Industrial Strategy (BEIS) committee said that while there would be widespread relief among consumers, “we must not forget that more than a million are set to sink into poverty without further support and will still be forced to make the stark choice between heating and eating this winter”.

He added: “Borrowing to fund these measures adds an eye watering amount to government debt, which taxpayers will be paying off over decades whilst excessive and unexpected profits are still being made by certain companies.

“Whilst welcome, this is a temporary response to an urgent issue. If the government is serious about tackling the energy crisis Ministers will quickly follow through with announcements on home insulation – the permanent solution to reducing energy bills – and further expansion of renewable energy.

“Fracking and new drilling in the North Sea will do nothing to change prices and won’t produce new energy for at least half a decade. They will however make it much harder for the UK to hit its net zero targets to tackle climate change.”

An Ofgem spokesperson said: “Ofgem welcomes this significant and unprecedented support for energy consumers across the country. It’s been clear to Ofgem and the government since we announced the new price cap that the new government would have to act urgently and decisively to support consumers and this package of support will be welcomed by millions across Britain.

“Given the scale of the crisis and the challenges that lie ahead, it is the right time to assess the approach that has been taken. Therefore, we welcome the reviews on regulatory structures and how we get to net zero by 2050. We look forward to working with government on both.”

Professor Karen Turner, director of the University of Strathclyde’s Centre for Energy Policy, said the plan offered much-needed reassurance but said it was too focussed on short-term issues.

On the cost of the package, Turner said: “Estimates of the total cost involved vary (substantially) upwards of £100 billion. The total cost will depend on how prices evolve going forward, and on how we adjust supply and demand. At present, government’s plan is to pay for this unprecedented scale of intervention by accumulating more public debt in the hope that future economic growth will make this manageable.  However, just how, whether and when the economy can and will expand depends on multiple factors, including market responses to the growing government debt. Generally, there is a crucial need for real reflection, analysis, and consultation as to both the wider ‘who pays’ question and how the energy picture and wider policy landscape need to adapt going forward.

She added: “Looking beyond the ‘Energy Price Guarantee’ announced today, which is effectively ‘firefighting’ to mitigate the impacts of spiralling wholesale energy prices, it is necessary to direct attention to the source of the fire, what is causing the spiralling energy prices fuelling it, and how this is feeding through to inflation. This is the central issue in ensuring businesses are sustainable in a way that does not cause prices to continue to rise across all sectors, fuelling inflation and impacting the wider cost-of-living, both of which risk damaging the long term sustainability of the economy. For this reason, I hope that the interventions announced today on securing long term lower cost energy supplies will be managed and progressed effectively.”

The theme of balancing security of supply, decarbonisation and affordability sits at the heart of the agenda of the Utility Week Forum, which will take place in London on 8-9 November. Find out more here.