Catastrophic energy price surge: the people hit hardest

The energy price cap will rise to £1,971 in April, up 54% or £693 (the difference is due to rounding).That’s a record rise in bills. Pre-payment bills will rise £708 from £1,309 to £2,017. This affects 4.5 million people. Wholesale price rises are responsible for the lion’s share of the increase – up 104%, but the cost of energy company failures and a rise in VAT also play their part. The HL Savings and Resilience barometer found that only around a half of us have the wiggle room in our budgets to help us deal with price rises – falling to a quarter of those on lower incomes. Forecasting to the end of the year, only a third will have the wiggle room, including  just one in seven of those on lower incomes. Those in inefficient homes could see their costs rise to £4,729.34 a year. Rishi Sunak announced a package of support, including loans to energy companies, council tax rebates and support for people on lower incomes. It will cut at least £200 off your bill.

Ofgem will announce changes to how the price cap works tomorrow, including allowing a bigger rise in the price cap associated with rising wholesale costs; more flexibility to raise the cap more often in exceptional circumstances; and more reforms to kick in from October – which could include switching to review the cap four times a year.

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown: “The catastrophic surge in the energy price hasn’t shocked anyone, but it will stun all of us facing runaway energy bills, and for many people it will blow the fuse on their financial resilience. If you’re on a lower income and your finances are already on a knife edge, this could send you tumbling into the abyss. Meanwhile, if your home is draughty and poorly insulated, you could face unimaginable heating bills.

Wholesale prices drove the lion’s share of the increase – because these were up 104% to £1,077. There was also a big jump in what’s known as network costs from £268 to £371, due in large part to the huge cost of energy company failures, and arranging a ‘supplier of last resort’ for people whose supplier went under. The government also gets a boost from higher VAT payments- which are up from £14 to £22.

The energy price cap affects 22 million households – up from 11 million this time last year. That’s almost 80% of all homes in the UK, and we’ll all see our prices rise a staggering 54%. To make matters worse, it kicks in from April, when we face impossible pressure from price rises on all sides, with the added stress of higher National Insurance and Council Tax bills on top of rising food and petrol prices.

The jolt in the energy price will feed into inflation, which is likely to peak in April, and cause us even more of a financial headache, because it puts more pressure on the Bank of England to raise interest rates. This will make life more expensive for borrowers, so those who have borrowed to make ends meet will face a double-whammy.

Hardest hit

The spike in the energy price cap will be a jolt for us all, but for some people it has the potential to burn out the last of their financial resilience. The HL Savings and Resilience Barometer, produced with Oxford Economics, looked at how much of their income was already eaten by their costs before these rises. It found that only around half have a comfortable amount of wiggle room, and forecasting to the end of 2022 it found this was likely to fall to around a third.

Among the fifth of people on the lowest earnings, only a fifth currently have the wiggle room, and by the end of 2022 this is likely to fall to one in seven. It means that many will feel forced to borrow to make ends meet, others will not be able to pay the bills, and some will have to make dangerous choices about heating and eating.

If you’re living in an inefficient home, then energy bills are already a nightmare, but the price rise will keep you up at night. The energy rating system classes better insulated houses from A-C, and with the price cap set at £1,277, the average cost for these homes is £1.057. Those with a D rating face something closer to the price cap at £1,279, but those which are more poorly insulated cost a fortune to heat. F-rated homes cost an average of £2,226 a year to run and those rated G cost £3,071. Given that the price cap is set to rise 54%, that means people in G-rated homes will spend an incredible £4,729.34 a year on average.

Help announced

The government announced help for 28 million households – offering everyone £200, and most people £350, through three approaches. It’s going to help ease some of the pain, but bills will still be hundreds of pounds higher, and we will still be wrestling with horrible hikes in prices.

It’s loaning energy companies enough money to give everyone an up-front discount on their bills of £200 from October, which will be repaid in £40 instalments over the next five years. The idea is for them to borrow while prices are high in order to keep a lid on costs, and then claw back the money later. This will take some of the pain out of the immediate price rise, but will mean higher prices for longer – so energy bills are set to eat a bigger chunk of our income for years.

It has also announced a council tax rebate for those in properties banded A-D, which will be £150 on average. This will go to four in five households. It will also provide local authorities with a discretionary fund they can use to support people who are exempt from council tax and for those on low incomes who live in higher value properties.

Rishi Sunak announced that it will go ahead with plans to expand the eligibility to the warm homes discount to 3 million people. However, the devil will be in the detail of this expansion, because unless the government changes the way it works, it will be paid for by other energy customers – so will end up costing those on average incomes more.

What can you do?

If you haven’t already switched to paying by direct debit, it’s worth doing so, because people who pay by cash or cheque are charged £130 extra a year.

We’re already working hard to bring costs down. According to the ONS, a third (32%) of people who said their costs had risen recently also said they’re cutting back on energy use. If you haven’t yet tried energy-saving approaches like turning the thermostat down by one degree, switching radiators off in rooms that aren’t used regularly, being more ruthless about how often you run the dishwasher and washing machine, or installing draught-proofing and insulation, then now is the time.

According to the ONS, more than half are cutting back non-essentials elsewhere in their budget (53%). This is far easier if you have actually drawn up a budget, so you have an idea of what you’re spending, and the things it makes most sense to cut out of your budget while prices are sky high. Banking apps may have some useful features to make this easier, or you could consider a stand-alone app, which can help you set targets too.

The horrible truth is that for people whose finances are already stretched horribly thin, there just aren’t enough easy energy efficiency steps or non-essentials left to cut. There’s a real risk they are forced into impossible choices about heating and powering their homes.

It’s worth investigating whether there is any help available. Check whether your supplier’s warm home discount is still open for applications, and whether you qualify, because this can provide £140 off your energy bills. You should also check whether you qualify for a grant from your provider or your local council – both of which have specific support schemes for people who are struggling.

Why energy prices have risen

The global energy price spike started when the economy came back to life last year. As demand for gas increased, we faced lower stock levels – partly because the UK doesn’t have an enormous capacity for storage – and supply problems.

We heat around 85% of our homes with gas, and import around 50% of it, so had to buy it on the international market – where booming demand from a colder Europe and growing China overwhelmed supply. The wholesale price of gas in January was almost four times higher than in early 2021. We also make around 40% of our electricity from gas, so it pushed those prices up too.

What is the energy price cap

The price cap was introduced in January 2019, and sets a limit on how much energy companies can charge for each unit of energy on their default tariff (which you tend to be on if you haven’t switched or fixed).

They express this in terms of how much the average user will pay in a year. This isn’t an absolute cap on the total you’ll spend, so if you’re a high user on a price capped tariff you can still spend more than the official price cap.

The cap changes every six months, in April and October, and is announced two months earlier. The announcement today will be introduced in April. The cap is based on the average wholesale price during the six months before the cap is announced – so the new cap will be based on the price in the six months to 31 January.

It was introduced at £1,137 in 2019. It fell to a low of £1,042 in October 2020 (after the pandemic depressed demand), and has since bounced back. In October 2021, it was hiked by a record 12% and hit a new high of £1,277.

For the vast majority of the life of the cap, it has simply limited how much energy companies could charge people on their most expensive tariff, so you could save hundreds of pounds by shifting to a better deal. However, over the past six months, as prices rocketed, the market changed dramatically, so that currently no deal is cheaper than the price cap.”