UK energy price freeze an option for incoming Prime Minister Truss

FILE PHOTO: A gas cooker is seen in Boroughbridge

By Sinead Cruise and Elizabeth Piper

LONDON (Reuters) -Britain's incoming Prime Minister Liz Truss is considering a freeze on household energy bills to try to avert a winter cost-of-living crisis for millions of households, a source said.

Public borrowing would be used to fund the gap between current prices and an 80% rise in the amount suppliers can charge customers from October under the plan prepared by government officials, the source told Reuters.

The cost of the move, which will last until at least January, could eclipse the 70 billion pound ($80 billion) bill for the COVID-19 furlough scheme, but the government had decided it needed to act, the source familiar with the situation said.

The cost is likely to be recovered by a levy on bills payable over 10 to 15 years, said the source, who declined to be named because the plans are still under consideration.

Energy suppliers and the opposition Labour Party have called for a freeze on gas and electricity bills. The average bill is due to jump to 3,549 pounds ($4,084) a year next month, and further major hikes are forecast next year.

Truss, who moves from her role as foreign secretary, on Monday beat former finance minister Rishi Sunak in the race to succeed Boris Johnson. She will be formally appointed as Britain's prime minister on Tuesday.

"I will deliver on the energy crisis, dealing with people's energy bills, but also dealing with the long-term issues we have on energy supply," she said.

Investment bank Morgan Stanley said it was difficult to calibrate the cost of a complete freeze given gas market volatility.

"A 70-100 billion pound cost is a reasonable assumption, with reduced interest payments due to lower headline inflation providing some counter," it said.

Truss had earlier in the campaign said she favoured tax cuts over providing direct support to households facing unprecedented rises in energy bills.

Commercial banks are not involved in the household scheme, the first source said, but could be involved in a separate plan to support businesses.

The household relief plan is likely to be announced on Thursday to allow time to put it into action before October.

A government spokesperson said officials were preparing to introduce any new measures as quickly as possible, and they would add to the 400-pound discount on energy bills that has already been announced.

Europe's energy price crisis worsened after Russia's Gazprom on Friday said flows through its major Nord Stream pipeline to Germany would remain shut indefinitely.

Although Britain only receives around 4% of its gas from Russia, the squeeze in supply means less could be available from other suppliers such as Norway.

Wholesale British gas prices, which help to determine regulator Ofgem's price cap level, mirrored huge gains in Europe’s gas market on Monday morning, with the day-ahead contract up 133%.

($1 = 0.8687 pounds)

(Reporting by Sinead Cruise, Elizabeth Piper and Susanna Twidale; Writing by Paul Sandle; Editing by Alexander Smith and Lisa Shumaker)