As the thoughts roll into the colder months, families already grappling with a cost of living crisis have been warned to prepare themselves for penalizing energy bills.
The price cap – set by energy regulator Offgame – has already jumped to £693 this year, rising to £1,971 for the average dual fuel tariff since April. But things are about to get much worse.
By some estimates, the next limit – to be announced in August and implemented from October – could be set at around £3,500. If, as expected, Ofgem moves towards quarterly revisions, a figure closer to £3,850 has been set for January, with bills potentially reaching £500 during the first month of 2023.
According to the charity National Energy Action, eight million households are on the verge of fuel poverty. The next prime minister should make bills his number one priority, electricity provider Octopus Energy has said, if he wants to avoid a “winter holocaust”.
So far, no political party has come up with anything that comes close to tackling a problem of such scale and importance. The government is offering a £400 discount on the bills. Labor also wants to eliminate the VAT, and further reduce it to £100. These figures pale in comparison to the £2,500 increase that families will suffer within a year if the forecasts prove to be accurate.
One idea gaining traction – and proposed last week by lawmakers on the Business and Energy Select Committee – is a “social fee”. But what is it and can it ease the pain of bill payers?
What is a ‘Social Tariff’?
In short, this includes low-income households that receive significant discounts on their energy bills, funded by taxation or spreading subsidy costs among better bill payers. These are already common in telcos, with some phone and broadband providers offering basic packages for people to get certain benefits, such as Universal Credit.
At this time, while there is some assistance available through the Warm Homes scheme and a new £400 rebate, there is nothing to stop even the poorest people from facing electricity bills.
Why is it getting support?
At the moment, the only thing keeping any sort of lid on energy costs is the price cap, which was introduced by Offgame in 2019 and covers 22 million homes. An attempt to deter profiteering energy companies by charging customers the most expensive variable tariffs, it limits the amount they can pay for each unit of gas and electricity.
But gas and electricity prices are largely at the mercy of wholesale markets, fueled by factors including Russia’s invasion of Ukraine. Britain gets less than 4% of its gas from Russia, but some European countries get more than half. The interconnected nature of gas markets means that when Europe’s gas prices rise, so does Britain’s, as everyone else competes for the same commodity.
The result is that the price range, which affects wholesale market prices, has increased significantly. For some of the smaller energy suppliers, many of whom had not hedged against such spikes, the cap did not rise sharply and they simply broke, exposing the weakness in the system.
Not only this, the prices are not likely to come down any time soon. After Russia cut supplies to Europe via the Nord Stream 1 pipeline last week, fueling fears of a continent-wide winter gas shortage, analysts at Cornwall Insight predicted an average annual bill of more than £3,500 to our The pass could be “well 2024”.
In a 90-page report published last week, lawmakers on the influential Business and Energy Select Committee threw their weight behind an alternative proposal: social charges. This, he said, would provide “deeper price protection for vulnerable consumers”. He was partly persuaded by the support of Martin Lewis’ view of Money Saving Expert, Britain’s well-known expert on austerity and financial justice.
How will this work?
There are many options, but Fair by Design, a group that campaigns to stop over-costing essential services for people in poverty, envisions a social tariff that works as an entitlement for someone who who is in poverty, or at risk of it. It is defined as spending more than 10% of household income on energy.
“At the moment, we think this should be a deductible of around £1,000 per year for a low-income family,” said Carl Packman of Fair by Design and the Barrow Cadbury Trust Charitable Foundation. He points out that some energy companies used to offer social tariffs before the energy cap, but it was not universal and the terms were defined by individual companies. “We want to see one that is market-wide and centrally defined, so that all suppliers can offer the same,” he said.
Has it been tried anywhere else?
Move over Belgium, which has been subject to social charges for years. Brussels earlier this year announced a package of measures in response to rising energy prices, including VAT cuts and one-time payments. This would extend social tariffs to more households and expand the degree of support available.
According to figures from the Ministry of Energy, those receiving tariffs will save an average of €1,760 (£1,480) on bills in the winter months.
What are the drawbacks?
It is not clear who will operate such a scheme. If the suppliers run it themselves, it would require a somewhat complicated data-sharing agreement with the Department of Work and Pensions to make sure the right people are getting it. To avoid this, and to be truly universal, a government department or offgame would have to run it – not likely to go over well with supporters of small government in the Conservative Party.
Fair by Design suggests that there should be a tapering system, so that there is no rock where one who earns a little more than his neighbor gets nothing.
What do energy companies say?
They are divided. Some of the “big six” providers, such as British Gas, EDF Energy, Scottish Power and E.ON, are largely in its favour. A cynic might say this because they hope that a social tariff will completely change the price threshold, allowing them to charge exorbitant amounts from some people, while giving good publicity to helping the less fortunate. On Aadhaar – or simply the government is getting subsidies. part of it.
“We need to set a tariff for these consumers, which is not paid by all other customers, but is funded by the Treasury,” said Derek Licorish, president of energy company Utilita.
But a spokesperson for Octopus Energy, one of the challenging brands that has survived the energy crisis, said: “A social tariff may be an option – but a reformatted one to save all customers from the old days.” Should be with a price range. Dodgy pricing.”
So does the price cap remain?
Fair By Design thinks it should. “we do not want [the social tariff] Can be seen as a replacement for an existing value security, which also serves a purpose. They are there to prevent suppliers from making excessive profits.
“This is specifically for customers to make sure energy is affordable. It shouldn’t be seen as an either/or.”
Lawmakers on the Trade and Energy Select Committee offer a slightly different view. They advocate the removal of the price cap, but say there should be “relative” tariffs to the rest of the market, along with social tariffs. This would include bridging the gap between the cheapest and most expensive deals – an attempt to avoid a return to the days when energy companies put people on sky-high variable tariffs, especially customers they have long had. which were not likely to change.