Britons are facing substantial increases in their energy bills. here’s why

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LONDON — An expected spike in UK energy prices this winter is being described as a national emergency, posing a financial threat at least as great as the coronavirus pandemic.

The upcoming increase in a regulator-set limit on consumer energy bills is set to push the majority of households into fuel poverty and strain budgets that could hammer industries like hospitality, travel and retail.

On Wednesday consultancy Auxilione released a revised forecast for the cap, which almost all energy providers charge, predicting an increase from its current rate of £1,971 ($2,348) a year to £3,635 for three months from October 1.

In subsequent quarters it says the cap could rise to £4,650 and £5,456 without intervention, bringing it to more than a fifth of UK median income.

The average household paid £1,400 for their energy in October 2021.

Why energy prices are rising so much

Global wholesale gas and electricity prices were already rising in 2021 due to rising demand following the reopening of economies from Covid-19 shutdowns and increased competition for fuel. supply between regions.

Russia’s invasion of Ukraine in February then led to sharp cuts in gas supplies to Europe, pushing European natural gas prices to a record high and also triggering higher oil prices. ‘electricity.

Although the UK only receives 3% of its gas from Russia, compared to around 35-40% for the whole of the European continent, it is linked by pipeline to the rest of Europe and is a net importer.

The UK has a particularly high demand for gas, as it has a higher proportion of gas-fired homes than most European countries and generates around a third of its electricity from the combustion of natural gas.

“The impact has been exacerbated by high electricity prices in Europe, where drought conditions have affected hydroelectric plants and unplanned outages have reduced French nuclear production,” Joanna Fic, vice president, told CNBC. senior at Moody’s.

Price cap debate

Since the start of 2021, 31 British energy companies have collapsed due to soaring wholesale prices, with their customers being transferred to other market players.

The remaining suppliers are reimbursing the costs of the extra energy they needed to buy through household bills, adding £69 to the last April price cap of £1,971 which lasts six months. From October 1, the cap will apply in three-month periods to reflect the greater volatility.

As well as destabilizing companies that had not sufficiently hedged their energy purchases, the price cap – which makes Britain something of an exception in the way it deals with energy prices – has deemed unsuitable for failing to prevent current price increases. for consumers.

According to regulator Ofgem, the cap was introduced in 2019 to prevent consumers who do not regularly switch suppliers from facing excessively high charges, rather than to prevent overall price increases dictated by wholesale markets.

Could other providers collapse?

Nicolas Bouthors, equity research analyst at Paris-based AlphaValue, told CNBC that a few small-company bankruptcies were still possible this winter, but it was likely that all or most would weather the storm.

“The weak suppliers have come out and the strong remain” following the recent turmoil, he said.

However, there is no doubt that millions of people will struggle to pay their bills at the currently planned price cap levels (the official figure will be announced by Ofgem on August 26).

The government has so far announced a one-off grant of £400 to help all households pay their bills, with an additional payment of £650 for households on means-tested benefits and £300 for pensioners.

Yet in light of updated forecasts, it now looks “very modest”, Moody’s Fic said, and will still leave many households struggling to pay, and utilities – many of which operate on thin margins – facing the risk of growth in bad debts.

Urgent need

Although the public, commentators and politicians on all sides argue that far greater measures are needed to avert an unprecedented crisis over the winter, the candidates for the post of British Prime Minister, Liz Truss and Rishi Sunak, bumped into each other. plans to deal with it.

Both said it was necessary to wait for the new price cap to be confirmed by Ofgem, and for the measures not to be confirmed until after the end of the leadership election next month.

“The scale of the problem – which is similar to Covid in terms of financial impact on the general population – requires government intervention,” Nathan Piper, head of oil and gas research at Investec, told CNBC. .

While the likes of British Gas owner Centrica have been criticized for not doing more for consumers after reporting healthy first-half profits, Piper said the sector as a whole was unable to to incur the kind of losses it would have to compensate for wholesale price increases, which could remain high for years.

“For those who are most in difficulty, suppliers will be flexible on payment, but there is a limit to the loss they can suffer because you want a healthy electricity sector when this crisis is over and that you want suppliers to remain.

“Short-term impacts on supplier earnings can help for a while, but they need to stay healthy enough to survive the period, when you clearly had too many suppliers that weren’t strong enough before.”

Ultimately, Piper said the government would need a plan to either set energy prices at their current level and cover the difference with suppliers, or raise the energy price cap and offer household discount.

Possible action

So far Sunak has said he will cut sales tax on energy bills and find £5billion to support low-income households, potentially by extending the recently announced windfall tax on energy companies.

Truss said she could exclude ‘high earners’ from the £400 payment and focused her message on offering the public wider tax cuts and suspending the green tax on energy bills.

Meanwhile, the opposition Labor Party has said it will freeze the current price cap by extending the windfall tax and finding other savings.

The scale of the current emergency has also led to a debate over whether to renationalise the energy sector or temporarily nationalize energy companies unable to bring prices down, as advocated by former Prime Minister Gordon Brown.

Some, including Utilita Energy chief executive Bill Bullen, have argued that any additional support package should be targeted at low-income households; others say the scale of the problem requires the widest possible safety net.

Centrica and Octopus, a renewable energy group, reportedly discussed with government ministers a plan to secure funding from commercial banks that would allow them to freeze the current price cap and recover the money in the longer term through a surcharge on invoices. .

Rebecca Dibb-Simkin, director of marketing and product at Octopus, told CNBC the company had already absorbed £150 million in cost increases on behalf of its customers and was handling 40,000 calls a day. She said while the company was well supported by the pensions, energy and investment giants, more government support for the sector was needed as the crisis continues, particularly in the winter.

Octopus recorded an operating loss of £1m in its UK energy retail business in the 2020-21 financial year.

‘It’s a mess’

AlphaValue’s Bouthors said the plan proposed by Centrica and Octopus would be desirable for suppliers as a means of obtaining compensation for current costs and avoiding additional taxes on windfall profits.

“But he also needs leadership and guidance from politicians, and for now we are still waiting for the next prime minister,” he said.

Although Bouthors said the current situation in the UK is “definitely” not good enough, he said he believed a plan would eventually emerge as in other countries.

“Every European country has found a solution, either through free money or windfall taxes, so I think a balance will be struck in the UK,” Bouthors said. “But right now it’s a mess, and very complicated.”

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