LONDON — Britain’s energy regulator announced Friday it will raise its main cap on consumer energy bills to an average £3,549 ($4,197) from £1,971 a year, as campaign groups, think tanks and politicians call on the government to tackle a cost-of-living crisis.
The price cap limits the standard charge energy suppliers can bill domestic customers for their combined electricity and gas bill 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 £2,017 to £3,608.
The cap does not apply in Northern Ireland, where suppliers can increase prices at any point after getting approval from a different regulator.
Gas prices have soared to record levels over the last year as higher global demand has been intensified in Europe by low gas storage levels and a drop in pipeline imports from Russia following its invasion of Ukraine. This has also increased electricity prices.
Earlier this month, Ofgem announced it will recalculate the cap every three months rather than every six months to reflect current market volatility.
Consultancy Cornwall Insight forecasts the cap could rise to £4,649.72 in the first quarter of 2023 and to £5,341.08 in the second quarter before coming down slightly to £4,767.97 in the third quarter.
That is still up from an average £1,400 annual bill in October 2021, and the current £1,971 cap.
‘A catastrophe’
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 £650 one-off payment going to 8 million vulnerable households. Some suppliers 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 with the Covid-19 pandemic and the 2008 financial crisis in terms of its impact on the population.
“A catastrophe is coming this winter as soaring energy bills risk causing serious physical and financial damage to families across Britain,” said Jonny Marshall, senior economist at the Resolution Foundation think tank, ahead of the announcement.
“We are on course for thousands to see their energy cut off entirely, while millions will be unable to pay bills and build up unmanageable arrears.”
There are also concerns over the effect on U.K. businesses, which are not protected by the cap and may face a hit from the erosion in consumer spending power.
Leadership election
Several strategies for tackling the crisis have been put forward by politicians, consultancies and suppliers themselves, but the ongoing U.K. leadership election has meant no new policy announcements have been made despite the looming spike in bills.
The candidates, Liz Truss and Rishi Sunak, have both spoken of the need to provide additional support for households and businesses but said no decision will be made until the new prime minister is elected on Sept. 5.
At a leadership hustings Thursday night, Sunak said he would provide further “direct financial support” for vulnerable groups.
Truss, the current favorite to win the contest, repeated previous comments about wanting to use tax cuts to reduce pressure on households, reversing the recent increase in national insurance tax and suspending the green energy levy on bills.
Plan needed
Options on the table are thought to include freezing the price cap at its current lower level — which energy suppliers argue would need to be financed through a government-overseen funding package in order to prevent destabilization of the industry — or allowing the price cap to rise and extending household support.
Consumer group Which? on Thursday said the government needed to extend household payments from £400 to £1,000, with an additional one-off minimum payment of £150 to the lowest-income households, to prevent millions falling into financial distress.
The opposition Labour Party has said it would freeze the April-to-October cap through winter by extending the recently introduced windfall tax on oil and gas companies, scrapping the universal £400 payout and finding other savings to freeze the cap over the winter.
Scotland’s first minister, Nicola Sturgeon, tweeted, “This rise must be cancelled, with the UK gov and energy companies then agreeing a package to fund the cost of a freeze over a longer period, coupled with fundamental reform of the energy market.”
The Department for Business, Energy and Industrial Strategy commented, “As well as existing government support, the civil service is making appropriate preparations so that any new support or commitments on cost of living when the new Prime Minister is in place can be delivered as quickly as possible.”
Massive impact
Jonathan Brearley, chief executive of the Office of Gas and Electricity Markets, known as Ofgem, said any response needed to “match the scale of the crisis we have before us” and involve the regulator, government, industry, NGOs and consumers working together.
“We know the massive 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 support package is delivering help right now, but it’s clear the new prime minister will need to act further to tackle the impact of the price rises that are 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 need to think the unthinkable in terms of the policies needed to get sufficient support to where it’s needed most,” said the Resolution Foundation’s Marshall.
“An innovative social tariff could provide broader targeted support but involves huge delivery challenges, while freezing the price cap gives too much away to those least in need. This problem could be overcome with a solidary tax on high earners – an unthinkable policy in the context of the leadership debates, but a practical solution to the reality facing families this winter.”
Cost of buying gas
Emma Pinchbeck, chief executive of Energy UK, the trade association for the energy industry, 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] make a negative margin and have for the last few 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 far greater than the industry can meet, despite the help that’s been put in place, despite charging the maximum they can for the cost of buying gas.”
Pinchbeck said the industry favored a deficit tariff plan that would allow suppliers to keep prices at their current level and have their costs met by a loan because it was the quickest to implement.
Wider challenge
Marco Alvera, chief executive of renewable energy firm TES-H2, told CNBC’s “Squawk Box Europe” that higher gas prices were a pan-European problem since gas moves freely between countries around the Continent.
“Unless people are thinking of closing the borders of gas, which I haven’t heard anyone say, we should really think about this as a European gas crisis that can only be met with European solutions. With price caps, with other measures that are being asked, which now need to be urgently implemented,” Alvera said.
“We need to work now before the winter comes on solidarity mechanisms, because we cannot have consumers and households freeze in one country and factories open in another country. We really need to agree as soon as possible that households and retail consumers come first.”
Facing soaring wholesale prices, European governments have been coming up with their own support packages for citizens.
France has fully nationalized energy supplier EDF at an estimated cost of 9.7 billion euros ($9.8 billion), and capped increases in electricity tariffs at 4%.
German households are set to pay around 500 euros more on their annual gas bills until April 2024 through a levy to help utilities cover the cost of replacing lost Russian supplies, with electricity prices also set to increase. The government is discussing a sales tax exemption on the levy and a relief package for poorer households, but has also been criticized for failing to announce adequate support.
Italy and Spain have both used windfall taxes to fund a combination of handouts for households in need and limits on bills rising to unaffordable levels.