Energy companies may face windfall tax as British Gas poised to raise bills by 20 per cent

The Government is to consider implementing a windfall tax on energy companies after calls by MPs for "urgent" and "fundamental" reforms to cut fuel poverty.

The news comes as British Gas revealed that its 16 million customers could be hit with increases of 20 per cent or more this week when the company's parent, Centrica, announces its latest financial results. EDF Energy, the French group that supplies five million households in the UK, raised its prices by up to 22 per cent on Friday, the equivalent of a £204 increase in the average annual bill to £1,211 for someone buying both gas and electricity from it. Mr Brown said at the weekend that the latest rises were "unacceptable".

The windfall tax proposal, also being promoted by trade unions, could prove an attractive one to Gordon Brown as he draws up a package of measures to help families struggling with soaring prices and the problems in the housing market. It could form part of his attempted autumn fight back.

Such a tax would come in the context of the sizeable profits made by Britain's leading energy suppliers, many of which have earned huge revenues from soaring oil and gas prices. Families have already faced one round of punitive energy bill increases this year – about 15 per cent in January – and face further hikes.

Asked about the idea yesterday Ed Balls, the schools minister and a close ally of Mr Brown, said he did not want to "pre-empt" policy decisions but recalled that Labour had introduced a windfall tax on privatised utilities in 1997 to fund its New Deal for jobless youngsters. David Blunkett, the former Home Secretary, added to the calls yesterday when he asked of the rising prices: "Why can't we put in place policies that challenge on behalf of the public those who are exploiting them."

In a report published today, The Business and Enterprise Select Committee calls for reform "through improving market design,specific regulatory steps, and by continuing to work for liberalisation of European markets".

The committee voices "concerns that the UK's energy markets are not functioning as efficiently as they should". It says that given "the extreme need of many households, there is compelling rationale for at least a modest, one-off top-slicing of these gains to help fund action to reduce the energy bills of vulnerable families in the long term."

The committee report warns that if the Government "remains committed to eradicating fuel poverty" it must have in place "policy instruments specifically designed to achieve this aim that do not rely on ongoing subsidy of fuel bills. A great many households face a difficult winter; it is imperative that the Government reviews its approach to fuel poverty and does so urgently."

The report also says: "The Government must consider whether the Carbon Emissions Reduction Target and Warm Front should be more precisely focused on helping the fuel-poor and whether synergies between the initiatives can be more actively exploited."

The MPs also criticise the Government for cutting spending on energy-efficiency grants. "[It] is very disappointing that the Government has reduced the budget for Warm Front when the need for it is greatest. This is especially so, given that HM Treasury has received additional income from the auctioning of permits."

Malcolm Wicks, the energy minister, said in June that "the era of cheap energy is over".

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