Government warned to act now to prevent another energy bills crisis

Energy UK has again warned the Government of the growing economic cost of failing to tackle high energy bills, with predictions pointing to the biggest rise in four years come January, while customers are in an even more challenging financial position.

This week saw the current price cap, which runs until the end of December, rise by 4% – or the equivalent of £60 a year for the ‘typical’ household – but projections for January are indicating a far higher increase of around £350 and would see the annual bill for a ‘typical’ household reach around £2,100.

In new analysis, Energy UK highlights that this is approaching the equivalent level at which the Government previously intervened following Russia’s invasion of Ukraine (see below). The industry association is urging Government to learn the lessons of the last crisis and act now to avoid a repeat of the £36 billion spent supporting all households in winter 2022/23.

The case for urgent intervention is underlined by the increase in customer debt since that time – which is now set to reach a record £7 billion by the end of the year. An extended period of high energy bills means that not only have millions of households continued to accumulate debt, but that the costs of that bad debt to all bill payers have now reached an average of £67 a year.

Although the Government has moved some policy costs into taxation and just cut VAT from electricity bills, these savings have been wiped out by high wholesale prices, driven in part by international events. The projected very high energy costs necessitate immediate action this winter to support households struggling the most with their bills. But it also requires enduring solutions to accelerate electrification and reduce our exposure to volatile global fossil fuel markets, with high wholesale gas prices having led to the UK spending an extra £100 billion over the last five years without receiving an extra molecule.

Energy UK is therefore underlining the need for action across three areas:

• Additional targeted support: The Government should provide additional targeted support, over and above that currently provided by the Warm Home Discount, using existing available data to better identify households in need of help. Tiering such rebates could be a stepping stone to the more permanent social discount scheme proposed by Energy UK in August.
• An ambitious energy debt strategy: Once this additional support has been delivered, the Government must work with Ofgem to launch a debt relief scheme for the most severely affected households as part of a strategy that will also help prevent debt build-up through measures in relation to new tenants and homeowners; greater use of smart Pay-as-you-Go and reducing the number of customers paying by Standard Credit method, which is both more expensive and also accounts for three-quarters of total debt and arrears.
• Removing levies from electricity bills: As highlighted above, the UK’s exposure to high gas prices underlines how important it is for more of our homes, transport and businesses to switch to electricity for their energy needs. So, the Government should take more policy costs – such as the remainder of the Renewables Obligation and the Feed-in-Tariff – off electricity bills and into general taxation, and work with the industry on a wider electrification strategy.

When energy costs spiked after the invasion of Ukraine, the Government capped bills at £2,500 for all households – which otherwise would have been as high as £4,400 – as well providing a £400 rebate. Ofgem is now using updated measurements for the typical household used to communicate the price cap – which means that a £2,500 bill back in 2022/23 would be equivalent to around £2,100 today.

Dhara Vyas, Chief Executive of Energy UK, said “The energy industry has long urged the Government to take action to reduce bills – and the latest predictions of steep rises in the middle of winter make that message even more urgent.

“The Government has indeed moved to help bill payers by removing policy costs and VAT but sadly, the ongoing conflict in the Middle East – and its effect on energy costs – is wiping out these savings.

“It looks like energy bills in the New Year will approach the level at which the Government intervened following the invasion of Ukraine. We cannot afford to wait for the same scale of crisis before acting again. We must heed the lessons from that time.

“As the current debt levels illustrate, many households have not recovered from the last crisis, as energy bills and other cost-of-living challenges have continued to bite. The Government must act now to prevent this situation getting worse and causing even more problems over the longer term. Last-minute emergency interventions run the risk of being badly targeted and costing us all more.

“This immediate action must be followed by more permanent measures to tackle the problems of high energy bills and debt – including their effect on inflation and the wider economy – which we know will persist otherwise.”