Natural gas is the mainstay of UK electricity generation, directly powering millions of homes and accounting for around 45% of electricity supply. It has soared in price, up 400% in the past year and 1,000% since 2019, according to futures market ICE. The prospect of a tripling of the energy price cap in October to £3,600 – from £1,254 in 2019 – is behind the Bank of England’s warning of a long recession from the autumn, characterized by soaring inflation, falling level and increase in unemployment. The central bank’s response is to raise interest rates to reduce inflation. Liz Truss, ahead in the race to become Tory leader and prime minister, has a solution – broad tax cuts to boost growth. Labor will provide targeted support for those struggling most with their bills, combined with measures to boost investment. But there are calls for more to be done. Here we discuss some options.

Lower price cap

What if the regulator Ofgem said bills are not going up in October? About half of the current inflation rate of 9.4% can be attributed to increases in energy costs, and so the effect would be to further limit price increases. A lower rate of inflation would take the pressure off workers to negotiate for higher wages and, without strong wages, the Bank would have less need to raise interest rates. Around 23 million households have their domestic energy bill governed by the energy price cap. Ofgem says if it kept the average dual fuel tariff at April’s £1,971 then the rising cost of wholesale gas would be absorbed by the industry. The regulator has decided not to go down that route because it says forcing utilities to absorb the cost would make them all loss-making and drive many into bankruptcy. They would need a government subsidy and billions of pounds in bailout loans for those who collapsed. But the government could go that route and own a merged utility. France already owns most of its national electricity supplier, EDF, and is set to buy the remaining shares to keep prices high. Inflation in France is 5.8%.

Bigger windfall tax

Britain produces natural gas and oil in the North Sea. As chancellor, Rishi Sunak agreed to apply an extra 25% levy on the industry’s windfall, which he said would raise £5bn. To address earlier concerns that a windfall tax would deter investment, he allowed companies to offset 80% of their new investment costs against the tax. Combined with existing tax breaks, oil and gas companies get 91p off corporation tax for every pound they spend on investment. But there is no evidence that windfalls are being invested. The industry plans investments 10 to 15 years ahead, and windfalls are typically passed on to shareholders with higher dividends and share buybacks. The same is happening now. So the government could apply 25% without tax relief, creating a figure approaching £15bn.

More generous benefits

The government’s energy bill support scheme provides a £400 discount on bills in October for every household, a £650 one-off payment to eight million low-income households, £150 for those on disability benefits and £300 for pensioners. This was designed when the forecast for the October price cap was £2,800. MPs on the business, energy and industrial strategy committee warn the package has been “overshadowed by the scale of the crisis”. The National Institute for Economic and Social Research said “any fiscal easing would be best directed at universal credit”, which it said should rise by £25 a week for at least six months from October. In addition, energy grant should rise from £400 to £600 for 11 million low-income households. The bills are so high that the subsidies would not be considered inflationary – just keeping the wolf from the door.

City salary cap

Bank officials said they raised interest rates by 0.5 percentage points – the biggest margin in more than 25 years – because they fear wage increases next year will outpace inflation and create a wage/price spiral. They admit there is little sign workers are using their power to secure big pay rises at the moment, but that could change if inflation remains high. To underline how weak wage demands have been so far, the latest official figures show average earnings rose 4.3% in the year to June and 6.2% with bonuses. The majority of bonuses are paid in the financial, professional and business services industries. If the Bank is so concerned, it could limit the bonuses of the City firms it regulates. This would lower average wages and stop the most egregious example of wage inflation, with city firms immune to the energy crisis being rewarded with huge paychecks. The other sectors where pay has risen sharply are being hit hard by staff shortages, mainly due to visa restrictions imposed by the UK on EU workers. Higher wages are welcome in hospitality, travel and leisure, but the businesses are caught short of skilled replacements when staff move for higher pay to a rival, forcing them to turn away clients. Abolishing visa rules and free movement would be another way to ease wage pressures.