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Government must take action to avoid ‘cost of living catastrophe’ as 6.3m households face fuel stress

The new price cap will be announced on 7 February 2022, before coming into force in April. Image: Getty.

The new price cap will be announced on 7 February 2022, before coming into force in April. Image: Getty.

The number of families experiencing fuel stress is set to triple overnight when the price cap is reset, reaching 6.3 million households.

According to new research from charity Resolution Foundation, if the price cap increases by around 50% – as it is predicted to by the likes of Cornwall Insight – the number of households that find bills unaffordable will jump from 9% to 27% across the UK.

This will impact those in the North East and the West Midlands the most, with levels expected to hit 33% and 32%, respectively. Other groups expected to particularly feel the pinch include pensioners (38%), those living in local authority housing (35%) and those living in homes with an EPC F-rating (69%).

While the charity welcomed the fact the government is considering paths to help manage the surge in pricing, it called for the focus to be on lower income households, utilising the benefits system as the most effective way to provide support to these groups. This could be done through a faster-than-currently-planned uprating of benefits, which are set to rise by 3.1% in April.

Alternatively, changes to the Warm Homes Discount could help, including increasing it from £140 to £300 a year, broadening it to make all families that receive pension credit or working age benefits eligible (around 8.5 million families), making it automatic, making it timelier, and finally funding it through general taxation rather than increases to the energy bills of others. Doing this would cut the number of households in fuel stress by around 5%, said the Resolution Foundation.

Resolution Foundation has also called for broader action to cut energy bills for everyone else by spreading the cost of supplier failures over a number of years. In 2021, a record 27 suppliers collapsed as high gas prices squeezed companies.

Of these, all but Bulb were placed into the Supplier of Last Resort (SoLR) mechanism to protect customers – Bulb was deemed too large and was therefore put into special administration.

The cost of the SoLR is approximately £2.4 billion according to Cornwall Insight, adding £90 per household to bills, assuming 27 million customers can cover the sum.

By splitting this cost over a number of years, and temporarily transferring the social and environmental levies from energy bills to general taxation, the Resolution Foundation found everyone’s bills could be cut by around £245. This would reduce the number of households in fuel stress by 7%, or 1.7 million, at a cost of £4.8 billion.

If the government were to take a dual approach – and target both low income homes and provide general support – bills could be reduced by as much as £545 a year. This would cost around £7.3 billion, but cut the number of households in fuel stress by two thirds, or 2.7 million.

“While not cheap at £7.3 billion, this plan is affordable, and by cutting bills by up to £545 would help prevent the upcoming rise in energy bills turning into a cost of living catastrophe for millions of families,” said Jonny Marshall, senior economist at the Resolution Foundation.

Additionally, the charity has called for longer term measures to avoid such an energy crisis in the future, including energy market reform, better insulation for homes and a reduction in the country’s dependency on natural gas by promoting heat pumps, renewables and nuclear.

The Resolution Foundation’s call has joined a host of others, from charities, MPs and energy companies, for new measures to protect households from surging bills. Suggestions for the best path forwards include changes to VAT in the short term and a windfall tax on north sea oil and gas companies, while the government is reportedly also assessing the possibility of cutting the Energy Company Obligation – this however has been criticised by many as very short-sighted.

Overall, reducing the reliance on imported gas by transitioning faster to renewable energy and low-carbon heat technologies like heat pumps will be key to avoiding such a crisis in the future. In a report from the Institute for Government last week, the thinktank highlighted the importance of the government managing the current crisis without compromising decarbonisation efforts, as it could risk loosing political and public support for net zero if mismanaged.

Ofgem will announce the new price cap on 7 February, ahead of it coming into force in April.

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