LONDON – Britain’s energy regulator announced on Friday that it will raise the main cap on consumers’ energy bills to an average of £3,549 from £1,971 a year, as campaign groups, think tanks and politicians urge the government to tackle a cost-of-living crisis.
The price cap limits the standard price energy suppliers can bill domestic customers for their combined electricity and gas bills in England, Scotland and Wales, but is recalculated by Ofgem throughout the year to reflect wholesale market prices and other industry costs.
It covers around 24 million households. The 4.5 million households on prepayment plans face an increase from £2,01[ads1]7 to £3,608.
The restriction does not apply in Northern Ireland, where suppliers can increase prices at any time after receiving approval from another regulator.
Gas prices have risen to record levels in the past year as higher global demand has been intensified in Europe by low gas storage levels and a fall in pipeline imports from Russia following the invasion of Ukraine. This has also increased electricity prices.
Earlier this month, Ofgem announced that it will recalculate the limit every three months instead of every six months to reflect current market volatility.
Consultancy Cornwall Insight estimates the rate could rise to £4,649.72 in the first quarter of 2023 and to £5,341.08 in the second quarter before falling slightly to £4,767.97 in the third quarter.
That’s still up from an average annual bill of £1,400 in October 2021, and the current cap of £1,971.
In July, the government announced it would pay a £400 grant to all households over six months from October to help with bills, with an additional one-off payment of £650 to 8 million vulnerable households. Some suppliers have also announced support packages for customers.
However, this has been widely criticized for not addressing the scale of the problem, which has been compared to the Covid-19 pandemic and the 2008 financial crash in terms of its impact on the population.
“Disaster is coming this winter as high energy bills risk causing serious physical and financial damage to families across the UK,” Jonny Marshall, senior economist at the Resolution Foundation think tank, said ahead of the announcement.
“We are on course for thousands to see their energy cut off completely, while millions will be unable to pay bills and build up unmanageable arrears.”
Several strategies to tackle the crisis have been put forward by politicians, consultancies and suppliers themselves, but the ongoing UK leadership election has meant no new policy announcements have been made despite the looming rise in bills.
The candidates, Liz Truss and Rishi Sunak, have both spoken about the need to provide extra support to households and businesses, but said no decision will be made until the new Prime Minister is elected on September 5.
At a leadership Thursday night, Sunak said he would provide additional “direct financial support” to vulnerable groups.
Truss, the current favorite to win the contest, repeated earlier comments about wanting to use tax cuts to ease the pressure on households, reverse the recent rise in National Insurance Tax and suspend the green energy levy on bills.
Plan is necessary
Options on the table are believed to include freezing the price cap at its current lower level – which energy suppliers argue must be funded through a state-monitored funding package to prevent destabilization of the industry – or allowing the price cap to rise and extending household support.
Consumer group Which one? on Thursday the government said it would extend household payments from £400 to £1,000, with an extra one-off minimum payment of £150 to the lowest income households, to prevent millions falling into financial hardship.
Opposition Labor has said it will freeze the April to October cap through the winter by extending the recently introduced windfall tax on oil and gas companies, scrapping the £400 universal payout and finding other savings to freeze the rate over the winter.
Scotland’s First Minister Nicola Sturgeon tweeted: “This increase must be cancelled, with the UK Government and energy companies then agreeing a package to fund the costs of a freeze over an extended period, combined with fundamental reform of the energy market.”
Jonathan Brearley, chief executive of Ofgem, said any response was needed to “match the scale of the crisis before us” and involve the regulator, government, industry, NGOs and consumers working together.
“We know the huge impact this price cap increase will have on households across the UK and the difficult decisions consumers now have to make,” Brearley said.
“The Government’s support package is helping right now, but it is clear that the new Prime Minister will need to take further action to deal with the impact of the price increases coming in October and next year.
“We are working with ministers, consumer groups and industry on a set of options for the incoming Prime Minister that will require urgent action.”
“The new Prime Minister will have to think the unthinkable in terms of the policies needed to get sufficient support where it is needed most,” said the Resolution Foundation’s Marshall.
“An innovative social tariff can provide wider targeted support, but involves huge delivery challenges, while freezing the price ceiling gives too much away to the least needy. This problem can be solved with a solidarity tax on high incomes – an unthinkable policy in this context. of the leadership debates , but a practical solution to the reality families face this winter.”
CNBC has contacted the government for comment.
Costs of buying gas
Emma Pinchbeck, chief executive of energy industry trade association Energy UK, told the BBC on Friday morning that the industry would continue to call for government intervention to help both consumers and the impact on the wider economy.
“The most [suppliers] makes a negative margin and has in recent years, it is one of the reasons why we have lost 29 suppliers from the market. So when you look at this and the scale of this crisis, we are talking about something that is far greater than the industry can face, despite the help that has been put in place, despite charging the maximum they can for the cost of buying gas.”
Pinchbeck said the industry favored a deficit tariff scheme that would allow suppliers to keep prices at their current level and have the costs covered by a loan because it was the quickest to implement.
Faced with the same soaring wholesale prices along with varying degrees of dependence on Russian gas, European governments are coming up with their own support packages for citizens.
France has fully nationalized energy supplier EDF at an estimated cost of €9.7 billion, capping increases in electricity tariffs to 4%.
German households are set to pay around 500 euros ($509) more on their annual gas bills until April 2024 through a levy to help utilities cover the cost of replacing lost Russian supplies, and electricity prices will also rise. The government is discussing sales tax exemptions on the levy and an aid package for poorer households, but has also been criticized for not announcing sufficient support.
Italy and Spain have both used windfall taxes to fund a combination of handouts to needy households and curbs on bills rising to unaffordable levels.