UK borrows big again to ease energy shock

·3-min read

Britain's new leader Liz Truss has capped soaring consumer energy bills for two years in a package to limit the economic shock of war in Ukraine that could cost the country about STG150 billion ($A255 billion).

With Britain facing a lengthy recession sparked by a near quadrupling of household energy bills, Truss - appointed prime minister on Tuesday - set out what she described as bold immediate action to protect consumers and businesses.

"We are supporting this country through this winter and next, and tackling the root causes of high prices so we are never in the same position again," she told parliament on Thursday.

"This is the moment to be bold, we are facing a global energy crisis, and there are no cost-free options."

Under the plan, Truss said average household energy bills would be held at around STG2500 ($A4265) a year for two years, staving off the expected 80 per cent leap that was due in October and that threatened the finances of millions of households and businesses.

With wholesale gas prices remaining highly volatile, Truss did not put a price on the package. Deutsche Bank has estimated that the energy price offset plus tax cuts that she has also promised could cost STG179 billion ($A305 billion), or about half the sum Britain spent on the COVID-19 pandemic.

The scale of the plan, funded by government borrowing, has rattled financial markets. The pound fell against the dollar on Wednesday to levels last hit in 1985.

The full cost will be given in a fiscal update by new finance minister Kwasi Kwarteng later this month.

Separately, Truss said the Treasury would announce a joint scheme working with the Bank of England to address the extraordinary liquidity requirements faced by energy firms, worth STG40 billion.

Her announcement marked a major turnaround from a leader who had ruled out "handouts" during her campaign to succeed Boris Johnson but is now forced to act to stop families falling into destitution and businesses from going bust.

Along with the support for bills, Truss announced more than 100 new exploration licences for oil and gas in the North Sea and the removal of a ban on fracking for communities which are willing to go ahead with it.

European energy prices started to rise as the world emerged from COVID-19 lockdowns and then surged in February following Russia's invasion of Ukraine.

Average prices for British households, which are set under a cap, jumped by 54 per cent in April to STG1971 and were due to leap 80 per cent to STG3549 a year in October.

The new cap of STG2500 will mean average bills will remain at broadly current levels after factoring in a previously announced STG400 credit on bills and the removal of a levy.

The government expects the move to curb inflation by up to 5 percentage points. Consumer price inflation in Britain jumped to 10.1 per cent in July, the highest since February 1982, and is forecast to rise to 13 per cent in October.

While the new cap will soften the blow for millions of households it still poses a threat to those on limited incomes. An Office for National Statistics survey published in September showed more than four in 10 adults already found it very or somewhat difficult to afford energy bills.

Businesses will also be given support but the full details of a scheme that will be reviewed more regularly will be set out at a later date.

Economists believe the plan is also likely to add more than STG100 billion to Britain's borrowing, putting more strain on public finances with the energy crisis possibly lasting into next winter.