The price cap limits the standard rate that energy suppliers can charge 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 about 24 million households. The 4.5 million households on prepaid plans face an increase from £2,017 to £3,608. The cap does not apply in Northern Ireland, where suppliers can increase prices at any time after receiving approval from a different regulator. Natural gas prices have soared to record highs over the past year as higher global demand has been fueled in Europe by low gas storage levels and a reduction in pipeline imports from Russia following its invasion of Ukraine. This has also increased electricity prices. Earlier this month, Ofgem announced it would recalculate the cap every three months instead of every six months to reflect current market volatility. Consultancy Cornwall Insight predicts the cap could rise to £4,649.72 in the first quarter of 2023 and £5,341.08 in the second quarter before falling slightly to £4,767.97 in the third quarter. This is still higher than an average annual bill of £1,400 in October 2021 and the current cap of £1,971.
“a disaster”
In July, the government announced it would pay a grant of £400 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 vendors have also announced support packages for customers. However, this has been widely criticized for failing to address 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 rising energy bills risk causing serious physical and financial damage to families across Britain,” Jonny Marshall, senior economist at the Resolution Foundation think tank, said ahead of the announcement. “We are on track for thousands to see their power completely cut off, while millions will be unable to pay their bills and experience unmanageable backlogs.” Many strategies to tackle the crisis have been proposed by politicians, consultants and suppliers themselves, but the ongoing UK leadership election has produced no new policy announcements despite the looming rise in bills. The candidates, Liz Truss and Rishi Sunak, both spoke of the need to provide extra support to households and businesses, but said no decision would be made until a new prime minister is elected on September 5. In a leadership showdown on Thursday night, Sunak said he would provide further “immediate 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, reversing the recent rise in national insurance tax and suspending the green energy levy on bills.
A plan is required
Options on the table are believed to include freezing the price cap at its current lowest level — which energy suppliers argue should be funded through a government-supervised funding package to avoid destabilizing the sector — or allowing raising the price ceiling and extending household support. Consumer Group Which? On Thursday he said the government needed to expand 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. The opposition Labor Party said it would freeze the April-October cap until winter, extending the recently introduced tax on oil and gas companies, scrapping the £400 universal payment and finding other savings to freeze the cap during during the winter. Jonathan Brearley, chief executive of Ofgem, said any response 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 Britain and the difficult decisions consumers will now have to make,” Brearley said. “The Government’s support package is providing help at the moment, but it is clear that the new Prime Minister will need to act further to deal with the impact of the price rises coming in October and next year. “We are working with ministers, consumer groups and industry on a range 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 enough support where it is needed most,” said the Resolution Foundation’s Marshall. “An innovative social tariff could offer wider targeted support, but it involves huge delivery challenges, while the price cap freeze gives too much to those who need it least. This problem could be overcome with a solidarity tax on high incomes – an unthinkable policy in the context of leadership discussions, but a practical solution to the realities facing families this winter.” CNBC has reached out to the government for comment.
Gas purchase cost
Emma Pinchbeck, chief executive of energy industry trade union 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. “Most [suppliers] we make a negative margin and have in recent years, it’s one of the reasons we’ve lost 29 suppliers from the market. So when you look at this and the scale of this crisis, we’re talking about something much larger than what the industry can cover, despite the help that’s been given, despite charging as much as possible for the cost of buying natural gas.” Pinchbeck said the industry favored a deficit tariff regime that would allow suppliers to keep prices at current levels and cover their costs with a loan because it was the quickest to implement.
Greater challenge
Facing the same rising wholesale prices combined with varying degrees of dependence on Russian gas, European governments are preparing their own support packages for citizens. France fully nationalized energy supplier EDF at an estimated cost of 9.7 billion euros and limited electricity tariff increases 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, while electricity prices are also expected to increase. The government is discussing a sales tax exemption on the levy and a relief package for the poorest households, but has also been criticized for failing to announce enough support. Italy and Spain have both used windfall taxes to fund a combination of handouts for needy households and bill caps that are rising to unaffordable levels.
