When in December the UK government discussed raising a ceiling on household power utility bills, a warning immediately ensued, stating that such a move would throw millions into energy poverty. Now, the government is mulling over a second ceiling adjustment, and it won't be downward.
Last month, investment bank Investec forecast that electricity bills for UK households could soar by as much as 56 percent this year after Ofgem, the state energy market regulator, updates the energy price ceiling, the Financial Times reported. Now, the FT is reporting that analysts are warning of a second update, in October, which could bring the price increase even higher.
The report cites calculations from energy consultancy EnAppSys, which shows that the energy price cap that Ofgem updates twice a year could reach 2,000 pounds in April, from 1,277 pounds last year, rising further to up to 2,400 pounds after the October update. One British pound is about $1.36, so with the expected double increase this year, many British households may be paying the equivalent of $3,200 per year for electricity.
The cap concerns some 15 million British households who have chosen to pay for their electricity on the open market rather than under fixed-price deals. Unless the government intervenes, these households are in for a lot of financial pain.
According to a Guardian report citing research from think tank Resolution Foundation, the number of "fuel stressed" households in the UK will jump threefold in April, after the energy price cap adjustment to 6.3 million. With these forecasts, calls are multiplying for the government to do something about it.
"The current energy crisis is of economy wide concern, having a potential impact on business competitiveness, general inflation, and household affordability," Gareth Miller, chief executive of consultancy Cornwall Insight, told The Guardian. "It is vital that the magnitude and speed of actions match the scale of risk faced by the economy from the current situation, and that attentions turn away from quick fixes, and instead focus on large scale reform of the energy system."
Perhaps unsurprisingly, Miller's suggestions for the reform of the UK's energy system focus on low-carbon energy sources, although they also include local natural gas production because, as the consultant noted, "where we get gas from is irrelevant so long as we stick to a declining usage as we move to net zero".
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The declining usage is an open question, however. Earlier this week, Bloomberg reported that UK's peak-hour electricity prices soared to a one-month high because of low wind power output over the weekend. According to the report, the contract for the 5-6 p.m. slot electricity price in the UK on Monday surged above the 1,000-pounds per megawatt-hour threshold to stand at $1,585 (1,161 pounds) per MWh, according to data from the N2EX exchange.
The problem is turning into a more than a transitory one, too. The FT reported that the April energy price ceiling hike would coincide with increases in national insurance and income taxes, and this will all be happening in an environment of high inflation, deepening what is now officially called a cost-of-living crisis.
This puts the UK government in a tight spot, having to consider relief for the most "fuel stressed" households but also the power utilities that are going out of business in droves because of the record-breaking prices for electricity and natural gas. Suggestions are circulating, ranging from the removal of VAT on electricity to removing environmental levies on electricity bills, but the government has yet to act. When it does, the decision would likely determine the number of energy-poor households in one of the world's wealthiest economies.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More