Credit, Collections & Insolvency News
Households will face a record energy bill increase of 54% from April after regulator after Ofgem lifted the cap on default tariffs to £1,971.
With energy market prices increasing fourfold over the last year, Ofgem upped the maximum rate that suppliers can charge for an average dual-fuel energy tariff by £693. Once the increase comes into effect, it is expected that 22 million households which pay by direct debit will face an average of bill of £1,971 a year for their gas and electricity.
Those using pre-pay meters will, on average, see bills climb £708 to £2,017. In response to the price cap increase, Chancellor Rishi Sunak has outlined support measures that will see energy bill discounts totalling £350. This includes a repayable £200 discount on bills for homes in England, Wales and Scotland from October, with a further £150 council tax rebate for homes in England in council tax bands A to D. The council tax rebate, which will benefit about 80% of households, will not need to be repaid.
The price cap is updated twice a year and tracks wholesale energy and other costs. It stops energy companies from making excessive profits, ensuring customers pay no more than a fair price for their energy. The price cap allows energy companies to pass on all reasonable costs to customers, including increases in the cost of buying gas.
Under the price cap mechanism, energy companies will be allowed to pass on these higher costs from April when the new level takes effect. This is because energy companies cannot afford to supply electricity and gas to their customers for less than they have paid for it.
Over the last year, 29 energy companies have exited the market or been put in special administration in the wake of soaring global gas prices, affecting around 4.3 million domestic customers.
Jonathan Brearley, chief executive of Ofgem, said “We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can.”
“The energy market has faced a huge challenge due to the unprecedented increase in global gas prices, a once in a 30-year event, and Ofgem’s role as energy regulator is to ensure that, under the price cap, energy companies can only charge a fair price based on the true cost of supplying electricity and gas.”
“Ofgem is working to stabilise the market and over the longer term to diversify our sources of energy which will help protect customers from similar price shocks in the future.”
Reacting to the news StepChange Debt Charity says that it remains impossible to escape the conclusion that more people will experience debt problems in the face of rising cost of living pressures.
The added pressure of higher interest rates in the wake of today’s 0.25 percentage point rise by the Bank of England, with an expectation that inflation will peak at more than 7%, will not help soothe the concerns of worried households.
Typically, people experiencing debt have underlying problems that mean their income has reduced or they have had unexpected, unforeseen expenditure to contend with. However, “cost of living pressures” entered the top five reasons for debt among people turning to StepChange for help in November 2021, and remained there in December with 8% of new clients citing it.
Around 1 in 4 new StepChange clients are in arrears on electricity and/or gas at time of advice.
Compared to pre-pandemic levels, we have already seen a significant rise in the proportion of people in arrears on their electricity and/or gas bills over the past two years, even before the worst of the forthcoming price rises hit.
For example, 28% of new clients were in arrears on electricity in 2021 (compared to 17% in 2019, pre-pandemic), and 23% behind on gas bills (up from 13% in 2019).
Phil Andrew, CEO at StepChange Debt Charity, said “Energy prices are already a source of massive worry for people experiencing or at risk of debt, and despite the measures to try to smooth out the imminent price hikes, there is no escaping the likelihood that electricity and gas arrears are likely to worsen.”
“For people in debt, the risk of additional harm is huge. Energy costs are priority bills, but even if people do manage to pay them, they may well have to fall behind on other commitments to do so. It’s absolutely vital that Government and firms do as much as possible to cushion the blow, but also that other creditors recognise the drag this will have on household budgets and flex their expectations and the help they offer to customers accordingly.”
“We welcome the Government’s package of support, but it won’t plug the gap in household finances for people experiencing debt. Millions of fuel poor households are out of scope for targeted support, including those not in receipt of means tested benefits – who accounted for 48% of StepChange clients with energy arrears last year. Further support will be needed to prevent many more households falling into debt.”
Joanna Elson CBE, Chief Executive of the Money Advice Trust, the charity that runs National Debtline and Business Debtline, said “Rising energy bills will hit millions of households hard – and for those on low incomes in particular, today’s news will come as a damaging blow.”
“The government’s support measures will help a little – but energy rises will hurt a lot. Low-income households need the government to go further – with support
that matches the full scale of the problem. This should include uprating benefits and, thinking ahead, increasing the support available through the Warm Homes Discount.”
“Energy firms and Ofgem also have an important responsibility to customers in financial difficulty, and they need to work together to agree a new emergency
plan to help people in energy debt.”
Alex Hasty, Director at comparethemarket.com said “As the energy crisis continues, millions of households have endured price increases. In response, Ofgem has increased the energy price cap by £693 to £1,971 – based on average usage. The price cap applies a limit to the cost per unit that energy companies can charge for their default or standard variable tariffs (SVTs), this amount may go up or down based on your usage.”
“Given the uncertainty in the market right now, the best option for most households is to move on to an SVT rather than opt for a fixed rate alternative when their current deal comes to an end. We recommend that most stay on, or allow themselves to be moved onto, a default tariff.”
“We welcome the Chancellor’s announcement of a £9bn support package to help households offset the impacts of rising costs.”
Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said “The catastrophic surge in the energy price hasn’t shocked anyone, but it will stun all of us facing runaway energy bills, and for many people it will blow the fuse on their financial resilience. If you’re on a lower income and your finances are already on a knife edge, this could send you tumbling into the abyss. Meanwhile, if your home is draughty and poorly insulated, you could face unimaginable heating bills.”
“Wholesale prices drove the lion’s share of the increase – because these were up 104% to £1,077. There was also a big jump in what’s known as network costs from £268 to £371, due in large part to the huge cost of energy company failures, and arranging a ‘supplier of last resort’ for people whose supplier went under. The government also gets a boost from higher VAT payments- which are up from £14 to £22.”
“The energy price cap affects 22 million households – up from 11 million this time last year. That’s almost 80% of all homes in the UK, and we’ll all see our prices rise a staggering 54%. To make matters worse, it kicks in from April, when we face impossible pressure from price rises on all sides, with the added stress of higher National Insurance and Council Tax bills on top of rising food and petrol prices.”
“The jolt in the energy price will feed into inflation, which is likely to peak in April, and cause us even more of a financial headache, because it puts more pressure on the Bank of England to raise interest rates. This will make life more expensive for borrowers, so those who have borrowed to make ends meet will face a double-whammy.’
