Britain is watching yet another crisis unfolding at the moment and this time it’s on energy bills.
That may sound a tad hyperbolic but there is a very strong chance that the energy price cap – the only thing keeping a lid on household energy costs – will rocket 50 per cent in April.
Analysts at Cornwall Insight forecast that the average domestic dual fuel price cap tariff, the pricing people move to by default when fixed deals end, will rise to £1,925 a year – up £648 from £1,277 now.
Keeping warm: The energy price spike is likely to lead to bills shooting up by 50% on average for those on standard price cap dual fuel tariffs, says Cornwall Insight
The next revision arrives in autumn and they suggest on current data that the price cap could then climb to £2,255 for winter 2022-23.
If you’re anything like me, energy bills will feel like a painful monthly expense and one that you really aren’t looking forward to rising by £54.
And trying to switch won’t do you any good, the only deals on offer are fixed price ones way above the price cap level.
Nonetheless, like me, many This is Money readers will be able to grudgingly stomach the hike and feel it as just another part of the current cost of living squeeze.
Others, however, will be among the millions of people for whom this is going to be a real problem.
Warnings that rapidly climbing energy costs will lead to many vulnerable customers potentially having to choose between heating and eating have been arriving thick and fast for some time – and have stepped up since the start of the year.
According to National Energy Action, the April price rise could take the number of UK households living in fuel poverty from 4million to 6million.
The only silver lining is that the rise comes just as the warmer months arrive, but Britain’s springs (and summers) have an unfortunate habit of not always being that warm. Meanwhile, the energy price spike is widely expected to get even worse by the time the nights draw in again
No amount of future plans to better insulate our homes, or energy saving tips – be they useful ones or of the daft ‘do star jumps and cuddle your pet’ variety – are going to bridge the gap between already high prices and the even bigger bills on their way.
No amount of future plans to better insulate our homes, or energy saving tips – be they useful or of the daft ‘do star jumps and cuddle your pet’ variety – are going to bridge the gap
The Government therefore needs to quickly come up with a plan for how it is going to help struggling households.
And it needs to include measures that can give immediate relief, not ambitious talk about transforming our energy sector.
The latter is vitally important for the transition to greener energy, but the moment for creating extra gas storage, better regulating fly-by-night energy firms, and not being so reliant on overseas supplies has passed.
Now, instead, is the moment for working out how we help poorer pensioners and financially vulnerable households through the energy price spike that we know for sure is going to hit them in just over two months.
As a wealthy developed nation we believe in having a financial safety net. Making sure people’s homes are adequately heated and they aren’t sitting there in the cold and dark is part of ensuring a decent minimum standard of living.
The options to help households in the energy spike
VAT windfall adjustment
Defer failed supplier cost recovery
Move green levies to general taxation
Suspend green levies
Defer network costs
Loans to energy suppliers
Direct support to customers
Potential saving on annual bills
£30 per year
£90 per year
£90 per year
£160 per year
£160 per year
£330 per year
£500 per year
£500 per year
Source: Cornwall Insight
The tricky question is what do we do? Because there is no magic bullet here.
There has been plenty of talk of a VAT cut, which seems like an imminently sensible move, but the tax is only 5 per cent on energy bills and Cornwall Insight reckons this would shave just £90 on average off dual fuel bills.
Critics of a VAT cut say this would also help wealthier households. But I would argue that’s a red herring: there is a lot to be said for the odd universal benefit and a nation that hands out Winter Fuel payments to pensioners both rich and poor shouldn’t worry too much about a temporary VAT cut for all.
Other options, according to Cornwall Insight, include deferring recouping costs for failed suppliers, which would also save about £90, moving green levies to general taxation (£160), and deferring payment of energy network costs (£330). This New Scientist article digs into those in some more depth.
Meanwhile, either direct financial support to customers, or loans to suppliers to mitigate energy price rises could both be worth about £500 off bills.
These two are the big guns that could be wheeled out, but would cost the most money.
Longer-term we need a much better plan for Britain’s energy security than our laissez-faire, fill your boots, it’ll be grand way of thinking
The former could potentially be targeted only at the more financially vulnerable – although measuring that is hard in itself – with the extension of existing Warm Home Discount payments, along with a big bump up from their £140 level.
The latter would controversially involve giving private sector companies money, which seems both an odd idea and a tough sell to taxpayers, but it is increasingly seen as having some merit, according to an FT front page report this week.
Under this idea, the Government would give energy suppliers payments when wholesale gas prices rose above a certain level, in return for them not passing that on to customers, thus softening hikes and smoothing prices.
A kicker to make it more palatable would involve energy firms somehow returning money to government when prices traded below a certain level.
Whether any of these initiatives – either at the cautious or bold end of the scale – goes ahead remains to be seen – and we may get a package of them.
Something needs to be done though and the sooner a plan is created, the better.
Longer-term we also need a much better plan for Britain’s energy security than the laissez-faire, fill your boots, it’ll be grand way of thinking that has dominated the recent past and led us to be more acutely affected by the gas price spike than many other countries.
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