Energy crisis: Variable price cap would cut bills to £1,000 a year, think tank says

energy bills WEDNESDAY SEPTEMBER 7 File photo dated 08/02/07 of a gas hob with a bill from British Gas, as UK gas reserves are
NIESR claims its proposal is 'much more cost effective than freezing energy bills'. Photo: PA

A variable energy price cap would bring down the bills of the poorest households to around £1,000 a year and would be “much more cost effective than freezing energy bills” a think tank has said.

The National Institute of Social and Economic Research (NIESR) is proposing transforming the single point Energy Price Cap into a variable price cap where the price per unit of energy used rises with usage.

Read more: Liz Truss's energy bills freeze: What does it mean for me?

A variable price cap could reduce the bills of the poorest households from nearly £3,000 to around £1,000 per year, a 70% reduction.

Energy bills continue to rise.
Energy bills continue to rise.

“Our proposal would raise the bills of those who can afford it, cut energy costs for those who cannot while simultaneously incentivising lower energy usage from every household,” the think tank said.

NIESR said this would be financed by raising the cost of energy for those who use it most, which are richer households that can afford this rise in energy bills in terms of their income and their savings, taking their energy bills from about 2% to just 3% of their income.

The proposal is also designed to be “revenue neutral” which would not require further fiscal support such as extra borrowing or tax rises, unlike other policy ideas such as nationalising energy companies or freezing all energy bills.

Read more: Liz Truss's energy support package to benefit richer households, IFS warns

“It is more cost effective as freezing energy bills has been predicted to cost around £100bn over the winter period. Although there is evidence to suggest that such a substantial approach is affordable, we propose a way to achieve the same goal without such a cost to the exchequer and ultimately the taxpayer,” it said.

This variable price cap strategy could also be combined with more fiscal spending to help reduce the energy bills of both lower- and higher-income households.

“The incoming government is inheriting one of the greatest immediate policy challenges for a generation. Existing support is neither sufficient nor sufficiently targeted at the poorest households or those low-income households that struggle to make ends meet. We therefore propose a variable energy price cap to help the poorest and lower-income households while not increasing public debt or raising taxes,” NIESR said.

Watch: Why are gas prices rising?