SEF Weekly: Skyrocketing British energy bills and industry’s response
The week’s iteration of Smart Energy Finances (SEF) focuses on the British energy bills crisis which, quite frankly, is in a dire situation. A board resignation for Ofgem, industry responses to the escalating situation, the energy cap freeze and the EUA’s criticism of the cap effect on heat pump rollout all step into the light.
The current bills crisis has been developing steadily in Europe, with the war in Ukraine and Russia’s gas squeeze exacerbating it at various corners.
However, the crisis has become quite dire over the last two weeks in the UK, where energy bills are projected to reach, and worryingly surpass, £4,200 ($5,005) come January.
Estimates released earlier this month by Cornwall Insights project the price cap going above £3,500 ($4,171) on energy bills for the average household, hitting £4,200 when the cap is revised in January and peaking at £4,400 ($5,243) in April next year.
What this means is that from next year, the price cap will stay at an unaffordable level for the vast majority of energy consumers this same cap is meant to protect. And these prices are going to go much higher for a long time.
Additionally, to make matters worse, the bill increase is expected to add to inflation, which has reached 10.1%.
So, what has been the industry’s response, you might ask? Well, for one thing, a director at energy regulator Ofgem – which launched the price cap in January 2019 to keep down energy costs for households – has resigned.
Ofgem resignation
According to the Guardian, Christine Farnish, a non-executive member of the Gas and Electricity Markets Authority (Gema) – Ofgem’s board – tendered her resignation as she accused the regulator of favouring businesses over consumers with a rule change that will add as much as £400 ($476) a year to the average UK household energy bill.
Farnish said the regulator “gave too much benefit to companies at the expense of consumers”, according to a leaked internal Ofgem announcement reported by the Guardian. Across the UK’s 27m retail energy customers a £400 annual bills increase could cost households more than £10 billion ($11.9 billion).
There has been no public announcement of Farnish’s departure, although the regulator has removed her from their website. It is understood she objected to a change in the methodology used to calculate the price cap, which determines the average annual cost paid by households.
Under the change, energy suppliers will be able to charge customers for extra “backwardation” costs they incur when securing supplies in advance.
The resignation comes in as Ofgem has been facing increased pressure after being blamed by some critics for not preventing the collapse of 29 energy suppliers since mid-2021. The regulator reportedly put in measures to protect consumers in case of repeated incidents but has faced repeated criticism that it places business interests ahead.
Consumer rights expert Martin Lewis has previously accused it of “selling consumers down the river”.
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Energy cap freeze and industry response
In answer to the implications of the price cap, UK Labour Party leader Keir Starmer proposed on Monday an energy price freeze to mitigate the devolving situation.
Under the plan, the price cap – which is currently set at £1,971 ($2,349) – would be kept static until March, to enable household savings for British consumers.
The £29 billion ($34.6 billion) freeze, according to Labour, would be costed through the extension of a windfall tax on energy companies and by dropping the energy rebate with the hopes of reducing inflation.
Luke Murphy, Institute for Public Policy Research, stated how the plan will potentially lead to a cut on inflation by four percentage points, although businesses and other companies will still see inflation, which ultimately affects consumers.
Industries response to the energy freeze has been varied.
Energy giants Centrica and Octopus have backed the freeze while ScottishPower and Eon have proposed a ‘tariff deficit fund’.
In a statement, Keith Anderson – ScottishPower chief executive – proposed the fund, which would cover the difference between what consumers pay and the cost of gas and electricity supply.
The fund, which Anderson proposes be paid by government or a financial institution, would be repaid over a 10-15 year period to smooth out the costs. The fund would thus lighten pressure from increased bills but require billions of pounds’ worth of loans from banks.
Anderson commented on the measure: “Unprecedented times call for unprecedented action. And we need action imminently.”
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EUA – price cap blows hole in heat pump strategy
In response to the unfolding situation, the Energy and Utilities Alliance (EUA) have said the recent bills have blown a hole in the Government’s Heat and Building Strategy unveiled last October, which includes a key commitment to mass heat pump rollouts in British homes instead of gas boilers.
Claiming the strategy is “now dead in the water”, EUA Chief Executive Mike Foster stated the government is out of touch with the public:
“Research dictates a quarter of UK households across the UK have no savings, with some areas like the West Midlands at 42%. To continue to have a policy that asks people in the middle of an energy crisis to fit a heat pump costing as much as £10,000 ($11,918) is frankly perverse. The government needs to urgently come up with a credible domestic heating strategy that gives us a roadmap to heat our homes and deliver net zero.”
The government is currently subsidising the first wave of 90,000 heat pumps – the Boiler Upgrade Scheme – with a taxpayer subsidy of £5,000 ($5959) that is costing £450 million ($536.3 million).
But Foster says the subsidy leaves households trying to find the shortfall.
“Consumers can’t afford heat pumps; they can’t afford to retrofit their homes with energy efficiency measures; they can’t afford new radiators or to pay for a hot water cylinder to be installed. Put bluntly, most can’t afford to pay the bills soon coming their way with price cap increases. They have no savings and yet the government’s strategy is still to ask them to fit a heat pump they won’t be able to afford.”
According to the EUA, data from the Energy Savings Trust indicates that £450 million would provide 849,000 lofts with insulation, saving households £216.5 million ($258 million) a year on bills, while reducing carbon emissions by 509,400 tonnes.
If used to fit cavity wall insulation, 375,000 homes would benefit, saving £106.9 million ($127.4 million) a year on bills and reducing carbon emissions by 251,250 tonnes.
“We know Whitehall officials are worried it is failing. The total scheme, over three years, amounts to £450 million subsidising 90,000 heat pumps. That same amount means nearly one million homes could get free insulation, cutting bills by nearly £220 million ($261.6 million) a year. Surely that’s the greater prize in these difficult times?”
So, where do we go from here? If anything can be taken away from this situation, it’s that more needs to be done to place consumers higher up the value chain so that, rather than needing protection, they can protect themselves.
And how this crisis plays out will hopefully illustrate how consumer interests can secure a more important seat at the policy-making table.
Cheers,
Yusuf Latief
