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An Easter energy price shock looms for many

With the ‘Energy Price Guarantee’ (EPG) scheme now due to end on 31st March 2023, an energy price shock looms for many this coming Spring. Jeremy Hunt’s Fiscal Statement on the 17th of October advised that a Treasury-led review will be launched to consider how to support households and their businesses with energy bills from April 2023 onwards, with the review to “design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need.”

According to the House of Commons Library’s ‘Background to Autumn Statement 2022, published on the 11th of November, it is not certain whether the outcome of this Treasury-led review will form a part of the Chancellor’s Autumn Statement on the 17th of November.

Energy price cap rises since 2021

The scale of the energy price rise has been staggering. Less than 2 years ago the price cap (not a cap as such, but the maximum amount that energy suppliers can charge per kWh of energy) was set at £1,138 per year. The government’s Energy Price Guarantee has fixed the current price cap at £2,500 until 31st March 2023.

What will happen in April 2023?

Jeremy Hunt has said he will prioritise the needs of the most vulnerable, but it is not yet clear who will be protected from the eye-watering energy prices, how this protection will be enacted, and as mentioned above when this help will be announced.

Cornwall Insight, an energy consultancy firm, currently predicts that the energy cap for the period April to June 2023 will be £3,702 (a drop of £600 from their previous forecast) and the cap will remain around the £3,150 level for the rest of 2023. This predicted drop is due to a recent fall in wholesale gas prices yet to impact household bills due to energy companies buying their energy in advance.

Obviously, £3,702 is a substantial increase on the current £2,500 cap and while the rise will happen at a time when people may be starting to turn off their central heating, will still be a crippling financial hit for many. Below are the Cornwall Insight forecasts for the price per kWh of energy for the April to June 2023 period. *For reference, Ofgem (the government energy regulator) will base its April to June 2023 price cap on wholesale gas prices between 17th November and 17th February 2023.

Should the forecast prove to be correct it will result in households paying 5 times more for their gas and 3 times more for their electricity than they did just two years ago. Without ongoing support, this situation will not be sustainable for many households across the UK.

The rise in the cap will also coincide with the end of the ‘Energy Bills Support Scheme’ which was in addition to the price cap and provided all households with £400 of support applied in the form of discounts to bills between October and March.

Who will be protected?

Again, this has not yet been decided, but as the government intends to design a “new approach that will cost the taxpayer significantly less than planned” it is likely to mean that only the most vulnerable households will be shielded from the increase in energy prices come April. It should be said there is a potential benefit in holding off from making a decision, as a further decrease in wholesale gas prices could result in a broader package being offered due to a reduction in the cost of implementing the measures.

If the government is to target support, apart from providing it to those on means-tested benefits and other welfare benefits, I believe that those who pay for their energy via a Prepayment meter must also receive financial assistance. By definition, these are financially vulnerable households who in many cases have been forced to move to a prepayment meter (or have their smart meter changed to prepay mode) due to falling behind on their energy bills.


Over 4 million households in the UK pay for their energy in advance via prepayment meter and the number is on the rise

Prepayment Meters

There are approximately 4 million households in the UK that pay for their energy via prepayment meter. Unlike customers who pay via direct debit, prepayment customers don’t have the option of spreading their energy costs evenly throughout the year and this results in these households being at particular risk of financial hardship during the winter months.

Disgracefully, for many years these most financially vulnerable households paid a higher rate for their energy than the richest households in the country. While this injustice has only very recently been remedied, many face the worry of what the energy companies, like it’s some sort of lifestyle choice term ‘self-disconnection’ due to not being able to top up on credit. Further, the number of people being forced into prepaying for their energy has increased significantly over the last year. In some cases, they have been switched without their knowledge, by remotely changing the smart meter to prepay mode. Citizens Advice estimate that an additional 450,000 households could be made to pay for their energy with a prepayment meter by the end of 2022.

It is entirely right that the most vulnerable in our communities should be the first to receive support. However, due to the sheer scale of the energy price rises, it does lead to the potential for those households not in receipt of benefits to be placed in financial difficulties and a cliff edge in financial terms between those receiving benefits and those that do not.

How to fix the energy crisis

There are few quick fixes to the energy crisis we face, but there have been a number of missed opportunities by the current government which would have reduced the extent of the problem. The UK has some of the least energy efficient housing in Europe, but the Conservative government abandoned the ‘zero carbon homes’ policy in July 2015. Since 2016, over one million houses have been built which would have benefitted from that policy1. It’s disgraceful that one of the largest housebuilders in the country actually lobbied the government to abandon the zero-carbon homes policy.

Excerpt from the House of Commons BEIS Committee report ‘Energy Efficiency: building towards net zero’ July 2019

It remains a risk that further lobbying by housebuilders results in the watering down of the standards contained in the ‘Future Homes and Buildings Standard’ due to come into effect in 2025. The lack of enforcement and incentives for domestic renewable energy generation and storage has also been a missed opportunity. Smart battery storage acts like mini power stations, exporting to the grid during times of peak demand, yet it is only very recently that the government abolished the VAT on solar panels and battery storage.

On a positive note, ‘Part L’ building regulations that came into force on the 15th of June this year mean that new homes are required to produce at least 31% fewer carbon emissions and this should promote an increase in solar panel installation on domestic properties. However, it remains that the majority of current homes across the UK will require retrofitting to meet zero carbon emission targets.


Domestic solar panels and smart battery storage reduce the demand on the UK energy supply grid

The benefits of energy efficient homes

Energy-efficient homes bring multiple benefits as set out in the bullet points below:

• Energy savings: total energy use could be reduced by an estimated 25 percent by 2035 through cost-effective investments in energy efficiency and low carbon heat—equivalent to the annual output of six Hinkley Point Cs

• Cutting energy bills: Energy efficiency measures have already saved households around £290 per year since 2008.27 Reducing total energy use by 25 percent by 2035 would result in average energy savings for consumers of roughly £270 per household per year.

• Jobs: Similar scenarios suggest that between 66,000 to 86,000 new jobs could be sustained annually across all UK regions.

• Economic Growth: This ‘cost-effective’ approach would require an estimated £85.2 billion investment but would deliver benefits (reduced energy use, reduced carbon emissions improved air quality and comfort) totalling £92.7 billion—a net present value of £7.5 billion.

• Optimises infrastructure investment: Energy efficiency can prevent expensive investments in generation, transmission and distribution infrastructure and reduce reliance on fuel imports—with a present value of avoided electricity network investment of £4.3 billion.

• Competitiveness: The UK is a net exporter of insulation and energy efficiency retrofit goods and services.

• NHS savings: Reduced NHS costs of roughly £1.4 billion each year in England alone. The health service is estimated to save £0.42 for every £1 spent on retrofitting fuel-poor homes.

• Air quality: The present value of avoided harm to health is calculated at £4.1 billion in accordance with HM Treasury guidance.

Conclusions

Hunt and Sunak have talked of ‘eye wateringly difficult’ decisions that lie ahead and have prepped us for both tax rises and spending cuts. Now, this could be expectation management and the reality will not be as bad as what has been relentlessly portrayed in the media. However, it may also be an opportunity to justify public spending cuts and to cut costs across some areas of our welfare system. I suspect the devil will be in the detail, as the headlines will want to highlight their newfound ‘compassionate conservatism’. I have set out an alternative to the cuts in a previous blog here, which discusses the pressing need for a ‘wealth tax’.

As we are currently experiencing an unseasonably mild November, the impact of the doubling of energy prices since last winter has yet to kick in for many. When the cold weather does arrive, those paying by direct debit, me included, will feel no immediate impact. This is not the case for the millions of households paying for their energy in advance, for whom winter will arrive very suddenly with an instant financial hit.

We will shortly find out if the Chancellor’s actions match his promises of protecting the most vulnerable in our communities.

Julian Vaughan

12th November 2022

Sources and further reading:

The Conversation ‘The UK has some of the least energy-efficient housing in Europe’: https://theconversation.com/the-uk-has-some-of-the-least-energy-efficient-housing-in-europe-heres-how-to-fix-this-151609

House of Commons Business, Energy and Industrial Strategy Committee ‘Energy Efficiency: building towards net zero’ July 2019: https://publications.parliament.uk/pa/cm201719/cmselect/cmbeis/1730/1730.pdf

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