Ed Davey calls for halt to energy price cap increase to avoid ‘catastrophe’

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Liz Truss or Rishi Sunak should cancel the £1,400 energy price cap increase in October in a new “energy furlough scheme” and the government should absorb the £36bn cost of the hike, the leader of the Liberal Democrats has said.

Ed Davey said neither candidate appeared to have any policies that grasped the magnitude of what could happen this autumn. “We are facing a catastrophe this winter, a drop in living standards unlike anything we have seen in my lifetime,” he said.

Truss has previously said she would not give people “handouts” in the autumn despite the rises, although she has promised measures including canceling the national insurance rise and canceling green levies on energy bills.

The stance has alarmed a number of Conservative MPs, and new polling for the Lib Dems found that almost half of voters said they planned to spend less on food this winter because of inflation and energy prices. That figure does not significantly drop for Conservative voters: 41% said they would spend less on food.

Davey said his proposed intervention was costly and radical but was the only measure that would save many families from dire poverty this winter. A quarter of those polled said they would not put their heating on this winter.

Davey, a former energy secretary, said it would cost £36bn over a year and that there should be a new, broader windfall tax imposed on oil and gas companies’ profits, with fewer exemptions. He said he hoped it could bring in as much as £20bn.

He said the government could also find money from additional VAT revenues from higher than expected inflation.

“It would mean a huge sigh of relief across the country,” Davey said. “We’ve looked at everything we possibly can and the only thing that cuts it is saying: this rise can’t happen.”

The Lib Dems have termed the plan an “energy furlough” similar to the major intervention to pay salaries during the pandemic. “This price rise is another crisis – and you would spend less than 10% of what we did during Covid to prevent people suffering the worst social crisis in modern times,” Davey said.

“These rises hit poorer households twice as hard as richer ones. So this will help poorer households twice as much. It is dramatically progressive. And it is simple – it means you will have no one left without help, including those households where landlords may not pass on discounts.”

The price cap, which went up by £693 in April, is expected now to be about £3,400, an increase of 70%. Canceling the rise would mean the energy bill for a typical household stays at £1,971 a year.

But the measure would be exceptionally costly and might need to be repeated with further rises, adding to the spending. Davey said he believed that could be avoided, calling it a “one-off investment to protect people from this particularly dramatic hit”, but said it was possible further measures could be needed.

Ed Davey.

Ed Davey. Photograph: Henry Nicholls/Reuters

Davey said fossil fuel giants could still afford another windfall tax due to massive profits. BP and Shell made £29bn in profits in the first six months of the year alone. Truss has said she opposes windfall taxes and would not impose any further similar measures.

As chancellor, Sunak announced a windfall tax in May which was intended to deliver £5bn with a “temporary, targeted energy profits levy” of 25% but with a 90% tax relief for firms that invest in oil and gas extraction in the UK.

Sunak has vowed to cut VAT on energy bills, a move backed by Labour, which has said it would also scrap the tax breaks for oil and gas companies.

Davey said there was no choice but to tax producers further. “This is a genuine windfall… It is incumbent on a government who believes in fairness to have a fair tax system. In our view that means taxing them properly and canceling this price rise.”

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