Government Faces Challenge as Energy Prices Surge Due to Middle East Conflict
Ministers are currently exploring options to shield the public from escalating household energy bills if the ongoing conflict in the Middle East persists.
Since former President Donald Trump initiated a bombing campaign against Iran, oil and gas prices have risen sharply. Iran has retaliated by closing a vital shipping route through the Strait of Hormuz and targeting energy infrastructure.
Household energy bills are fixed until July, when the energy price cap is scheduled to be reset by the regulator, Ofgem. Projections indicate a possible 10% increase, which would add approximately £160 annually to the average household bill.
Energy Secretary Ed Miliband is reportedly of the view that prices must not be allowed to rise significantly, especially as the government currently maintains that it has reduced bills through decisions made in the last budget.
"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," said a source from the energy department.
When questioned about potential sharp increases in July, another minister responded,
"That can’t happen."
Treasury officials have indicated that discussions about mitigation measures are premature but acknowledged that such options would need to be considered if the conflict continues.
Economic Impact and Government Response
Analysis by the Resolution Foundation earlier this week highlighted the risk of an energy shock this year.
In her spring forecast speech on Tuesday, Chancellor Rachel Reeves pledged to "protect families from the turbulence that we see beyond our borders." She emphasized that when governments lose control of the economy, people experience the effects "in their pay packets, in their bills and in their mortgages," contrasting this with Labour’s approach.
Rising oil and gas prices have also led markets to reduce expectations for interest rate cuts by the Bank of England, which was another avenue through which Labour had hoped households would experience financial relief.
Energy providers have begun adjusting their fixed price tariffs, with industry data showing that 57 fixed price tariffs have been removed or updated in the past 72 hours, according to MoneySuperMarket.
One frontbench MP remarked,
"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."
A junior minister added,
"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."
Expert Warnings and Targeted Support
Experts caution against implementing a broad rescue package similar to the one introduced by Liz Truss in autumn 2022, following Russia’s invasion of Ukraine, which cost over £30bn across two years.
"This kind of government support is a key reason that debt has been rising in recent years," stated Helen Miller, director of the Institute for Fiscal Studies (IFS). She urged ministers to "try to target help to where it’s most needed."
The Resolution Foundation also emphasized that a renewed energy price shock would heighten the need for a "social tariff" to provide cheaper energy for the most vulnerable households.
Labour MP Graeme Downie, a member of the Energy Security and Net Zero select committee, stressed the importance of government proactivity, saying,
"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, commented,
"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."
He outlined three potential government interventions:
- Increasing access to solar panels, batteries, or electric vehicles to insulate households from rising gas prices.
- Shifting charges currently paid through energy bills to general government spending, particularly for new infrastructure costs, to create a fairer system.
- Possibly expanding the warm home discount to assist the most vulnerable, though this would also increase costs on bills.
Potential Fuel Duty Changes Amid Prolonged Conflict
If the conflict results in sustained high energy prices, Chancellor Reeves may face pressure to cancel the planned petrol duty increase scheduled for September, a demand already made by the Liberal Democrats.
The planned 1p per litre rise, announced in the November budget, is expected to be followed by further increases of 2p in December and another 2p in March, reversing cuts implemented by Boris Johnson’s government in 2022 after Russia’s invasion of Ukraine.
