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Power prices key concern as industry eyes upcoming price cap period

The power price cap may jump by as much as 46% in April. Image: Getty.

The power price cap may jump by as much as 46% in April. Image: Getty.

While the Current± team has been taking a break over the festive period, high power prices have continued to dominate the conversation in the energy sector, with growing concern over the impact they will have on households. Gas prices hit 450p per therm on 22 December, a new record high for the UK.

This continued the trend of high prices that saw gas prices up around 500% throughout the year, according to Reuters.

With Britain still relying on gas for 34.5% of the electricity mix in 2020, this has had a dramatic knock-on impact on electricity prices, for example, day-ahead wholesale prices averaged at £126.14/MWh in Q3 2021, up 69% from the previous record of £74.85/MWh set in the previous quarter, according to EnAppSys.

Given the unprecedented highs, the price cap is expected to jump significantly in April 2022, with analyst Cornwall Insight estimating it could rise by approximately 46% to £1,865. This would aid utilities, as many struggled over the past year with managing high wholesale prices without the ability to raise bills beyond the cap.

As such, 2021 saw a record number of supplier exits, with 27 in total including 25 since gas prices began to truly spike from August. This slew of collapses led Ofgem to announce it would consult on the energy price cap in November.

While a jump in the price cap would help suppliers, charity National Energy Action warned that the number of fuel poor households in the UK could grow to six million as a direct result of these surging power prices.

Currently, there are 4.5 million households in fuel poverty, with half a million of those entering fuel poverty since October 2021. Should the UK see the maximum expected price cap rise in April, this will grow by 1.5 million, the charity said.

“Every home should be a warm and safe place, but for over 4.5 million UK households the cold reality is very different and getting much worse,” said Adam Scorer, chief executive of National Energy Action.

“The cost of living in the UK is at its highest level in a decade with household energy bills the biggest driver. When the costs of essential services go up, those on lowest incomes get hit hardest."

In an effort to protect households from the rising costs, energy secretary Kwasi Kwarteng held a virtual meeting with bosses from the largest energy suppliers on 27 December to discuss pathways to protect consumers and customers.

However, multiple outlets reported that little came of the discussions, with OVO’s chief executive Stephen Fitzpatrick telling the BBC at the time that bills will “almost certainly” double when the new price cap is set.

The Labour party has called for changes to VAT to help reduce the impact of the surging power prices, with Ed Miliband MP, Labour’s shadow climate change and net zero secretary, stating just before Christmas that “the government cannot simply stand by and let families be clobbered by rises in bills of hundreds of pounds".

“Labour has already set out how the government should remove VAT from energy bills for six months, so that families have some respite during the winter, and make it a national mission over the next decade to insulate homes to reduce energy bills.”

Similarly, 20 Conservative MPs and peers penned a letter in the Sunday Telegraph at the beginning of January calling for prime minister Boris Johnson and chancellor Rishi Sunak to remove VAT and environmental levies on energy bills to help manage the spiraling costs.

The rate of power prices, and its reverberating impact throughout the entirety of the UK’s energy sector, is expected to continue to be a key challenge throughout 2022, with attention keenly focused on Ofgem announcing the new price cap in February.

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