The UK Price Cap Has Plunged Millions Into Energy Poverty

On Friday 26th August, energy regulator Ofgem announced the new price cap for household energy bills will be £3,549 per year. The cap indicates the maximum amount that suppliers are able to charge their customers per unit of gas and electricity used, as well as setting a cost for the daily standing charge, and will come into effect on October 1st. The price cap currently stands at  £1,971 per year, based on typical use for the average household, which is already a 54% increase on the £1,277 per year that was in place between October 2021 and March 2022.

The figure announced on Friday, as was predicted by many, makes for news that is at best sobering, and more likely depressing, for many households around the country. Due to the importance of this change, and what it represents for the wider energy crisis in Europe, it is worth taking a look at this pricing mechanism, why it exists, and what impact it has on both energy companies and households.

Photo by iMattSmart

Boom or Bust

Before diving into the present situation, it is worth glancing back at the winter of 2021/22, during which it seemed like there was a small energy supplier collapsing every week. The most notable of these collapses was Bulb, a company that provided over 1.5 million customers with their gas and electricity before ceasing to trade in late 2021 and entering into special administration on November 24th of the same year; a state of uncertainty in which it remains to this day.

A key reason behind the fall of so many small energy companies was Ofgem's price cap. The mechanism, introduced by Theresa May's government in 2019, was intended to prevent consumers who stayed loyal to their energy providers from having to pay higher energy tariffs than those who frequently changed providers to secure more favorable deals. While this seems an arguably admirable attempt to eliminate the profiteering of energy companies at the expense of the average consumer, the unintended consequences of introducing the price cap are now reverberating around the market louder than ever.

TTF Natural Gas Prices since September 2021, including ChAI's forecast until November 2023.

The price gap changed the landscape of the energy market in the UK because it gave a significant advantage to those companies with sufficiently deep pockets to hedge, or forward-buy, wholesale energy. The giants of the industry, such as Centrica-owned British Gas or Eon, were therefore at a significant advantage to those smaller players who would purchase their wholesale energy on shorter-term contracts. When Natural Gas prices started to rise and push the cost of wholesale energy above the price cap last winter, those companies who were buying at those high prices were therefore unable to pass on their costs to their customers, leading to the wave of suppliers collapsing last year.

Meanwhile, many of those industry leaders who survived last winter have been posting record profits in 2022. British Gas has pledged to donate £12 million, or 10% of its H1 2022 profits, to help the most vulnerable households through the impending crisis, which seems a well-intentioned gesture. Nonetheless, against a backdrop of parent-company Centrica's £1.34 billion profits from the first half of this year, it is likely that the offering from British Gas will be viewed as underwhelming. Reality is, of course, more nuanced than this; the majority of Centrica's profits have resulted from oil and gas exploration and the subsequent sale of the two commodities during a period of record-high prices, rather than from exploiting the bank accounts of ordinary households. However, during a time of national crisis, it remains to be seen whether nuance will guide debates as to how to tackle the crisis.

Photo by Anja van de Gronde

Time to Reconsider the Cap?

Friday's price cap announcement will make for bleak news for households and it is unfortunately a situation that is only likely to worsen. The new cap that will take effect on October 1st is only fixed until the end of the year, and another announcement will be made on November 24th regarding the limit for the period January 1st to March 31st, 2023. Predictions made by analytics firm Cornwall Insights previously suggest that the new year could bring a further raise of 31%, bringing the annual total up to the region of £4,500 per year for an average household. However, to coincide with the actual cap rise on the morning of Friday 26th August, Cornwall Insights have updated their forecast price cap for Q1 2023 to an eye-watering £5,386 per year.

It is clear that whatever the reality of the increased bills that households will face for their gas and electricity, some kind of change is needed to the domestic energy market. Cornwall Insights, when commenting on Friday's rise, stated that the cap was "never meant to be a permanent solution" and called for a review of all "viable alternatives" that could be implemented in its place.

Indeed some energy companies, including Scottish Power, have similarly called for an overhaul of the cap. The company's Chief Executive, Keith Anderson, was recently quoted in an article for the Financial Times stating that the cap should be replaced by a social tariff that would protect the most vulnerable households from significant bill increases, at least until the market stabilizes. While this could provide an imperfect solution, the concept of when the energy market will be 'stable' is another problem entirely.

Ultimately, any suggestions for long-term solutions to protect low-income households from crippling energy bills in an increasingly volatile world for oil and gas prices do not solve the immediate issue. Action to address the crisis from the government is yet to appear in a genuinely meaningful form, and though this may change following the confirmation of the UK's new Prime Minister on September 5th, many are understandably calling for a faster response. Today's announcement may indeed force more immediate action; fuel poverty for millions of households across Britain is no longer a prediction, but an inevitable reality.

By ChAI

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