Labour’s £29 billion energy bills plan would not fully cover the expected rise in the energy price cap, because it doesn’t take account of most customers’ higher gas and electricity consumption during the winter.
Freezing the price cap would cost consumers, energy companies or the government around £8 billion more than Labour says in its plans, according to the Institute for Fiscal Studies (IFS), which analysed the figures after discussion with Full Fact.
Our own analysis suggests that Labour’s plan contains a shortfall of around £5 billion for direct debit customers alone, and an additional shortfall for other types of customer.
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What is Labour’s plan?
The plan, announced by the party leader Sir Keir Starmer on 14 August, proposes that the government should freeze domestic energy bills at the level set by the April 2022 price cap until the end of March next year—instead of allowing them to rise in October 2022 and January 2023.
Labour’s announcement says: “Stopping energy bills from rising is a fully-funded measure, with a total cost of £29bn.”
In a television interview that he shared on Twitter on 22 August, Mr Starmer said of the plan: “We’ve said freeze those bills this winter. Make sure people don’t pay any more for their energy prices.”
Our analysis suggests that most people would still have to pay more than if the price cap hadn’t risen, despite the plan, unless extra funding was provided.
The announcement does not explain in detail how the money would be spent—for instance, whether it would be paid as compensation to the energy companies for charging less than the new cap allows, or as a reimbursement to customers to offset the rising cost of their bills.
However, it does say that the plan “wouldn’t let people pay a penny more on their fuel bill this winter”. On 18 August, Labour called for Parliament to be recalled in order to freeze energy bills.
Labour told us that its plan accounts for people’s energy expenditure between October and March. But it does not account for expenditure they would be committed to in future, based on the energy they used during those months, as we explain below.
Labour suggests raising the money the plan needs through a series of measures, one of which means it may not actually be entirely “fully-funded” either, as we wrote last week.
How did Labour work out the cost?
In a press release, Labour shared a document outlining its policy costs.
According to industry forecasts cited in this document, the annual cost for a typical household paying for both gas and electricity by direct debit is expected to rise from £1,971 (as set by the April price cap) to £3,582 in October, and then £4,266 in January 2023.
These are average annual costs, so they represent what that typical household would pay if you imagine the price cap staying the same for a year. Therefore direct debit customers would expect to pay, on average, £134 more per month from October to December and £191 more per month from January to March, compared with their current bill.
Full Fact’s analysis suggests that Labour combined these extra costs for direct debit customers to reach a total of £977 during those six months, although the party has not confirmed this.
Its policy document estimates that there are 15 million customers in Great Britain paying by direct debit and affected by the cap. Covering an expected rise of £977 in all their bills would therefore create a total cost of about £14.6 billion—which is very close to the £14.7 billion figure that the document says would be needed.
Labour seems to have done a somewhat similar calculation for households who pay by standard credit (reaching a total cost of £5.4 billion) and an adjusted version for customers who use pre-payment meters (£5.3 billion).
“The same level of support as is being provided to credit and debit customers” would be given to ‘off-grid’ customers (£2.6 billion), according to the document. (In our previous fact check, we established that this means customers who do not heat their homes with electricity or gas, although almost all will be electricity customers.)
Finally, Labour’s document gives a figure calculated using the Barnett formula for the cost of extending the same level of support to households in Northern Ireland (£0.8 billion).
Altogether, the party says this means the plan would cost a total of £28.9 billion. (This is £0.1bn higher than the five subtotals added together, which may mean that some of them had been rounded down.)
What’s the problem?
If people used the same amount of energy each month, then the rough cost of fully protecting them against price rises would be reflected in Labour’s plan.
But they don’t. People use far more energy in the dark and cold winter months, which is when the plan is meant to protect them.
According to estimates from the energy regulator, Ofgem, a typical household in a year uses around 2,900kWh of electricity and around 12,000kWh of gas, and around 56% of this electricity and 76% of this gas is used in the period from October to March.
Labour’s costings don’t allow for this. Instead they provide money for half a year’s rise in prices at a time when people are buying more than half of the year’s energy.
How much would it really cost to freeze the price cap?
Labour’s plan covers four different types of energy customer affected by the price cap, plus a grant for Northern Ireland, which makes it complex to calculate a precise total cost—not least because these customers may consume different amounts of energy of different types, and at different times.
Looking at direct debit customers alone, who make up the majority in Labour’s plan, and using Ofgem’s figures for domestic energy consumption in general, we estimate that the additional cost of their consumption during the winter would add about another £5 billion to the plan, or roughly £340 per household.
There would probably be further additional costs for the other types of customer as well—although Labour’s policy document does say that customers who use pre-payment meters “purchase more of their annual energy during the more expensive winter months”, so it may have accounted for seasonal patterns with that group.
On 26 August, Ofgem will announce the October 2022 price cap. It, and the January cap to follow, may not be the same as Labour’s forecasts assumed, which would mean that the actual costs of the plan would be different too.
The IFS’s view
While researching this article, we spoke to analysts at the IFS, who agreed that Labour has understated the cost of its plan, and estimated separately that the total cost when accounting for all customers would be around £8 billion higher.
In a statement, the IFS told us: “Energy use rises enormously over the winter months, and, as they stand, Labour's plans would not cover the cost of freezing prices for the additional energy consumed by households over this period.
“The roughly £8bn of costs the plan does not currently cover would either need to be paid for by the government, energy suppliers or households.”
The IFS has also criticised Labour’s proposals for funding the plan.
Tony Jordan, a senior partner at energy consultants Auxilione, helped us to estimate the unit costs implied by the price cap forecasts in Labour’s plan.
He told us: “It would appear this was taken with an old snapshot of likely wholesale costs and perhaps not properly considering the winter weighted consumption which is typically 70% of the annual. As such it is likely the cost estimate made is light.”
In answer to our questions, Labour agreed that energy consumption is higher in the winter, but told Full Fact that its figures account for the energy expenditure of different types of customers.
The party said that this was why it had accounted for the seasonal differences in bills for customers who use pre-payment meters, but not those who pay by direct debit or standard credit, whose bills are designed to be the same each month, based on their consumption the year before.
This is true, and would mean in theory that Labour’s plans would freeze the amount customers pay each month from October to March. But all the energy consumed during that time would still need to be paid for, even if some of those costs were paid for at a later date. As the IFS noted, these extra costs would either have to be paid by the government, the energy companies or the customers themselves.
Labour’s original statement said that the plan “would save the typical family £1,000”, but according to the forecasts in its document, the eventual cost to the typical family over the winter would in fact rise by significantly more £1,000.
To be clear, £29 billion would pay for most of the extra cost of people’s energy bills this winter, if the price cap rose according to Labour’s forecasts.
However, under Labour’s plan they would still pay more for energy used this winter because of the rising price cap, unless the government provided roughly £8 billion more funding or required the energy companies to absorb the cost, which Labour has not proposed to do.
We’re grateful to Dr Simon Evans at Carbon Brief, who also helped with our analysis.
Image courtesy of Chris McAndrew