UK Emerges From Energy Crisis, But Natural Gas Remains Expensive

Energy bills will finally fall this summer after nearly 18 months of sustained hikes, softening a painful cost of living squeeze for millions of Brits.

This year’s drop in wholesale gas prices on the spot market, thanks to Europe’s successful scramble for supplies last winter and China’s flagging economic growth, will soon be reflected in the long-term hedging arrangements energy firms make for customers.

Such developments raise the prospect of increasingly competitive deals from energy suppliers as the market returns to a semblance of normalcy, with customers finally able to have some real autonomy over their energy deals through fresh tariffs.

Super forecasters Cornwall Insight estimate the price cap will fall from its current level of £3,280 (US$4100) per year to £2,062 (US$2580) per year in July, before settling at around £2,100 into the new year.

These numbers are way down on the £4,279 (US$5359) per year price cap peak in January and should reduce the pressure on customers.

Nevertheless, energy bills will still be expensive compared to pre-crisis levels, tracking at around double the £1,000-£1,200 per year costs prior to Russia’s invasion of Ukraine, the collapse of dozens of British suppliers and the pandemic.

Meanwhile, the subsidised rates in Chancellor Jeremy Hunt’s slimmed down household support package will be above the price cap threshold – making its level of protection effectively meaningless unless there’s a price spike.

With support set to be pared back and the price cap still double pre-crisis levels, Citizens Advice previously called on the government to support up to 12m people on the lowest incomes with a lump sum, dictated by income and energy use.

This concept of a social tariff has also been backed by suppliers such as EON and Good Energy, while British Gas owner Centrica also lent its support to the idea last week.

Ofgem has also confirmed it is reviewing the prospect of a social tariff – raising the potential for an industry consultation.

The appeal of such a tariff makes sense, as a one-off payment to vulnerable customers could be cheaper than an extended universal support package, while also being more effective by being more targeted to people in need.

It would offer more support than the benefit system with universal credit and the Warm Home Discount providing relief to a comparatively tiny number of people compared to the numbers that can still be exposed by a doubling of their energy bills.

In terms of logistics, Citizens Advice has suggested HMRC combines its real-time data on household incomes with energy supplier data on how much electricity and gas each household uses.

However, this seems to be a simplistic understanding of a vulnerable customer.

After all, vulnerability is not just financial, it also includes customers with health issues and disabilities – making too much of a focus on income a limiting factor for support.  

Vulnerability can also be transient with customers being bereaved, bankrupt or ill for a certain period of time before later recovering – which is very hard to keep track of through data.

All of this could lead to painful edge cases where people who are clearly in need of support miss out.

There is also the question over whether a social tariff is sustainable – considering the potential long-term duration of higher energy bills.

Electricity prices are on course to remain elevated over the coming decade, according to Cornwall Insight, and the reality is that in a gas-driven crisis, shifting consumers away from gas is the boldest step to easing their energy bills.

To do this, the government’s focus should be on reviving onshore wind, ramping up offshore wind and massively expanding solar power so that green energy dominates our energy hub.

There also needs to be incentives around using less energy.

This could be achieved through more targeted funding for energy efficiency, such as heat pumps and insulation – rather than potential years of pay-outs.

As the UK emerges into a post-energy crisis marketplace, the government has tough decisions to make, and it is possible higher energy bills will simply be a feature of everyone’s lives until the shift from gas to clean, cheaper renewable energy is complete.  

By Nicholas Earl via CityAM

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