The energy sector has welcomed the £1,923 energy price cap announced today (25 August) by Ofgem but concerns remain over vulnerable households.
At a £151 decrease from the current cap, the Q4 price cap – which will run from 1 October to 31 December – hints at a slow return to prices nearing pre-energy crisis levels.
However, the termination of government support scheme which were available last winter, paired with poor energy efficiency in UK homes has caused worry about how households will cope this winter, sparking debate over the role of the price cap.
Less government support increases strain on households
“Well before the winter hits, we’re already helping record numbers of people behind on their energy bills. Today’s price cap announcement will do little to change that. Typical households are still facing sky-high energy costs, now that support schemes have come to an end,” said Gillian Cooper, head of energy policy at Citizens Advice, highlighting the continuing struggle to pay bills for UK households.
“Increasing numbers of people we help are in a negative budget, where they simply don’t have enough money coming in to cover even just their essential bills. The next few months will push households like these over the edge. Our data suggests it will be as bad, if not worse, than last winter.”
As the Energy Bills Support Scheme – which provided households with a £400 discount on their electricity bills to help mitigate the effects of rising energy prices – ended on 30 June, a number of sector players emphasised the additional strain on consumers this year.
“Another fall in the price cap from October is obviously welcome news for customers but energy bills are still much higher than they were 18 months ago. The Government’s energy bill support was a lifeline during an extended period of high prices but with that no longer in place, many customers will be paying a similar amount to last winter,” said Dhara Vyas, deputy chief executive at Energy UK.
“As a result, many people will continue to face a struggle to afford their bills, especially given the accumulated effect of high prices over the last year and a half – in addition to wider cost-of-living pressures.”
Simon Oscroft, co-founder of green energy supplier So Energy, said: “Even with the price cap falling again, more people than ever before are struggling to pay their energy bills. The new price cap level is still almost double pre-energy crisis levels, and more than households were paying a year ago when you factor in the removal of universal Government bill support that cushioned the blow last winter.
“We were also fortunate last winter that the mild weather meant energy usage was lower. Without further government support for struggling households, the risk and impact of a cold winter is deeply worrying.”
National Energy Action (NEA) has estimated that 6.3 million UK households could be left in fuel poverty this October.
UK households need more support
A number of industry members have called for better government support, especially for vulnerable households struggling to pay their energy bills this winter.
Dr Craig Lowrey, principal consultant at Cornwall Insight suggested bolstering demand-side strategies to help houses become more energy efficient.
“Elevating demand-side strategies, like government funding for home insulation and energy efficiency enhancements, could lead to reduced bills. At the same time, a broader approach of prioritising domestically generated energy to lower the influence of the global energy market on UK prices would reduce the impact of international supply shocks,” said Lowrey.
“Only through a comprehensive approach to tackling the issue of high energy bills, can we start to deliver a resilient and secure energy landscape for all.”
Due to our inability to control wholesale energy prices (predominantly set by oil and gas prices) domestic energy efficiency upgrades were also called for by George Neel, group marketing, communications and ESG director at technology company Accsys Technologies PLC to help households.
“Supporting homeowners to make their homes more energy efficient has to be a key priority, when helping protect people against high energy costs. Our research found that many homeowners have already made energy efficient upgrades, while more than half are considering making changes in the future, so there’s clearly an appetite to boost energy efficiency in our homes,” said Neel.
“According to energy.gov, heat gain and heat loss through windows is responsible for 25-30% of residential heating and cooling energy use.”
These sentiments were echoed by the Energy and Climate Intelligence Unit (ECIU) which warned that inefficiently insulated households could pay an additional £720 on their energy bills.
“Unfortunately we’re not out of the woods yet as gas prices are expected to stay at least 2x higher than pre-crisis levels in the longer term, and while lots of Europe has moved away from gas altogether we’re still reliant on it. Last year the IMF said that this reliance is why we were hit harder than other countries,” said Jess Ralston, energy analyst at ECIU.
“Those in the most inefficient homes could pay around £720 more on bills over the next year than those in energy efficient ones. We could have spent the last year insulating houses to shield them from future gas price spikes, and building more British renewables so we need to buy less expensive gas on the open market. Instead, there seems to have been a focus on the North Sea, which won’t bring down bills.”
Ralston also called for the government’s flagship insulation scheme to get “back up and running.”
Is the price cap still fit for purpose?
The continuing sky-high energy bill experienced in the UK has caused some members of the industry to join the Centre for Policy Studies in questioning the price cap role in the market.
CPS recently released a report which found that for the past two years energy suppliers have been placing their prices at or just before the price cap, turning the cap into a “de facto regulated market price.”
Lowrey voiced his concerns saying: “The debate around the merits and continued validity of the cap has been compounded by the current cost-of-living crisis. While there is no one simple solution to high energy costs, there are steps that can be taken. Protection of the vulnerable must be a primary concern, and the introduction of social tariffs such as those already in place for water and telecommunications remains an option.”
This was echoed by Richard Neudegg, director of regulation at Uswitch.com who said: “The price cap itself also deters suppliers from innovating and delivering better deals. It needs reforming in a way that offers protection for households while putting real pressure on suppliers to do better. Half of the population isn’t even sure what the price cap is or does.
“Instead of regulating the exact price of energy every three months and banning cheaper deals, we should set the principle we want to achieve in regulation – that a standard tariff is priced fairly, based on costs.
“This could require all suppliers to offer a transparent standard tariff that provides value for money to households, but also gives them the ability and incentive to do things better. Targeted support should also be available to the most vulnerable.”
Oscroft noted that the structure of the price cap itself was making it harder for consumers to find cheaper deals on their energy bills:
“Due to the complex way Ofgem’s quarterly set price cap is calculated, it is loading additional costs from the year on to suppliers in the Q4 price cap period. This will make it even harder for suppliers to price below the price cap level over the winter, meaning even less opportunity for customers to shop around and find cheaper deals. So Energy has been one of the only suppliers to offer fixed deals below the price cap level, but now will struggle to offer this in Q4 as things stand.
“This is another reason why the price cap is no longer fit for proposal.”
However, the call for a reconsideration of the price cap was not unanimous as some industry members, including Octopus Energy, voiced their support.
“The energy price cap has been one of the most effective policies to improve retail energy. Initially, it drove efficiency programmes because companies could no longer pass on bloated costs to consumers. Then it cushioned the impact of the energy crisis, buying crucial time for the government to implement support programmes,” said Greg Jackson, founder of Octopus Energy.
“It’s now forcing energy companies to pass on falling wholesales costs rather than pocketing profits. It protected customers – especially older and more vulnerable ones – from the loyalty penalty, and helped bring an end to the wild west of cowboy companies who sold at unsustainable prices leaving everyone to pick up the tab when they inevitably failed.”