Leading energy suppliers have joined charities in calling on the government to put in place a social tariff for those living in fuel poverty, after the industry regulator raised a cap on energy tariffs by up to £153 a year on Friday.
Millions of homes will be forced to pay some of the highest energy bills for the past decade after the cap was raised for some of the most vulnerable households in the country.
The price rise is scheduled for October, when cold weather is due to set in, and in the same month ministers have said that the special £20 a week uplift to universal credit will be withdrawn. It will also follow the unwinding of the furlough scheme at the end of September, which has shielded millions of workers from unemployment during the pandemic.
‘My heart sank’: how lifting energy price cap will hit the most vulnerable Read more
The looming energy affordability crisis has reignited calls for the government to establish a social tariff, priced at a discount to the standard energy price cap.
Quick Guide
What is the UK energy price cap and how does it work?
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How does the energy price cap work?
The cap, one of the biggest shake-ups of the energy market since privatisation, came into effect on 1 January 2019 for 11m households on default tariffs, known as standard variable tariffs (SVTs). The government told the energy regulator, Ofgem, to set the cap because ministers argued people on SVTs were being ripped off by big energy firms capitalising on consumer loyalty. The limit is not an absolute one but the maximum suppliers can charge per unit of energy and for a standing charge. There is a separate cap for 4m homes on prepayment meters.
So why are prices moving higher?
In short: if energy market prices climb higher, the cap must move higher, too. The cap is designed to reflect the costs energy suppliers face, the largest of which is sourcing gas and electricity from the wholesale markets. In recent months energy markets have reached historic highs because of tight global gas supplies, causing one of the steepest energy price increases on record. Market prices have continued to climb since the new cap was announced, meaning another rise is likely in April once the regulator has revised its cost assessments.
Is there any way to avoid the increase?
In the past, households could save hundreds of pounds a year by spending a few minutes on one of the many comparison sites, or by signing up to an auto-switching service, and moving to a cheaper tariff, either with their existing supplier or a rival one. But the recent market surge means even fixed tariffs, which are not covered by the cap, are more expensive than the energy price cap itself. The best bet to keep bills in check is to use less energy: if you can afford to invest in insulation this can make a major difference to how much energy you need. Lowering the thermostat by a couple of degrees may also be an option for some.
When will bills begin to fall again?
It is too soon to say. Energy market experts believe gas and electricity wholesale prices will remain high through the winter and into 2022 because energy demand is recovering rapidly after the worst of the Covid-19 crisis. Some believe households may face rising energy bills for another 18 months. In addition to market prices, the regulator includes the cost of using energy networks and paying for government policies – which are also expected to keep rising.
Jillian Ambrose
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Some of the largest energy suppliers including British Gas, E.ON UK, EDF Energy and Scottish Power have called on the government to legislate for the measure, which could be set below Ofgem’s price cap and paid for via an industry levy.
Michael Lewis, the chief executive of E.ON UK, has said a social tariff should be “one of the top priorities” for new energy legislation next year, and would “signal the government’s intent to deliver a fair and just energy transition to net zero, ensuring no one is left behind”.
His demands were echoed by Citizens Advice, which warned that almost 2 million households were already behind on paying their energy bills.
James Plunkett, an executive director at the charity, said the price increase would lead to a “perfect storm” for families this autumn.
“With bills rising and incomes falling, many families will find it hard to escape. For many, debt will be the inevitable consequence,” he said. “It all adds to the growing case to rethink the government’s planned cut to universal credit and keep this lifeline, which has been vital to keeping so many afloat.”
Calls have also grown for greater government support for home insulation and a swifter move away from gas heating to electricity, which could help cut the UK’s carbon emissions and also help improve the health and wellbeing of many of the most vulnerable in society.
Jonathan Brearley, the chief executive of Ofgem, said: “Higher energy bills are never welcome and the timing and size of this increase will be particularly difficult for many families still struggling with the impact of the pandemic.”
Ofgem said gas prices had risen to a record high in Europe “due to a recovery in global demand and tighter supplies”, which was increasing the cost of heating homes and pushing up electricity prices.
For 11 million households that pay by direct debit the average dual fuel bill will climb from £1,138 to £1,277 from October, up by £139. For another 4million households that use prepayment meters – which are typically more socially vulnerable – the average energy bill will climb from £1,156 to £1,309, up by £153.
The rise in the energy price cap is also expected to trigger a rise in fixed-rate deals, which are usually cheaper than default tariffs but which have been drifting higher as the UK’s gas market reached 16-year highs.
The rising energy market costs have raised fears that smaller suppliers may already be under severe financial pressure, and could go bust when a key deadline to hand over the renewable energy subsidies collected through energy bills looms at the end of the month.
Brearley said Ofgem had spoken to the government about “all the help that is available” for households living in fuel poverty including the option of a social tariff and would “welcome ideas about how we are going to tackle fuel poverty and how we’re going to address the genuine needs of some of the most vulnerable in society”.
The Resolution Foundation warned that the increase would disproportionately affect low-income families across the UK, many of whom are still suffering from the economic impact of the Covid-19 crisis.
The number of households struggling to keep up with their energy bills has grown by 410,000 compared with levels before the pandemic, according to a survey by Citizens Advice, while a further 6 million households were already worried about paying their energy bills.
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Brearley said: “I appreciate this is extremely difficult news for many people, my commitment to customers is that Ofgem will continue to do everything we can to ensure they are protected this winter, especially those in vulnerable circumstances.”
A government spokesperson said: “While the price cap still saves 15 million households up to £100 a year, the best way for consumers to keep energy bills down is to shop around for the cheapest tariffs on the market.
“To help consumers further, we plan to trial automatic switching for customers on expensive default tariffs to cheaper deals, and are extending the warm home discount so an extra 750,000 households get £150 knocked off their bill each year.”
