UK households “simply” do not have the money to pay their energy bills as these are set to cost around £2,000 more this year than last year, according to a think tank.
Even with the support that has already been announced, the four million households in the UK with pre-payment meters will be spending around 44% of their monthly disposable income on bills during the depths of winter.
Their energy costs might be around £613 during the month of January alone, the report by the think tank said.
Households on prepayment meters are seeing up to 90% of their gas top-ups going on repaying debt as they head into the winter months, separate data shows.
Almost 300,000 households had their gas and electricity pre payment meters set to recover debt when they top up in the first quarter of this year, according to Ofgem data obtained via a Freedom of Information request.
The Resolution Foundation warned that soaring energy bills risk becoming a “serious threat to families’ physical and financial health this winter”, the think tank said, adding that this income shock will be most acute this winter, when close to 80% of all annual domestic gas demand occurs.
Low-income households will also be hit the hardest as they will spend twice as much of their family budgets on energy bills as high-income families.
The Resolution Foundation fears “thousands” could see their power cut off and health endangered, while “millions could fall behind on bills, run up arrears, and damage their credit ratings.”
The number of UK households who are falling behind on at least one utility bill has increased from 9% to 14% between October 2021 and June 2022.
Estimates from Cornwall Insight, a consultancy, suggest that households’ average annual energy bills could grow from £1,971 now, already a hefty increase on the prior year, to an eye-watering £5341 in April.
“A catastrophe is coming this winter as soaring energy bills risk causing serious physical and financial damage to families across Britain. We are on course for thousands to see their energy cut off entirely, while millions will be unable to pay bills and build up unmanageable arrears,” Jonny Marshall, senior economist at the Resolution Foundation, said.
“The new prime Minister will need to think the unthinkable in terms of the policies needed to get sufficient support to where it’s needed most,” he added.
The think tank is calling on the government to deliver “significant fresh support” that will help low- and middle-income families on top of the £30bn has already been committed to supporting families with energy bills.
The Resolution Foundation said a 30% bill reduction for those on benefits, or with no-one in the household earning over £25,000 (with smaller savings for those with no-one earning over £40,000) would cost £15.4bn, but benefit 94% of the poorest half of households.
It added that a solidarity tax of a 1% increase in all income tax rates would see the large costs of a universal price reduction (£23.5bn) partially offset by a tax increase of £9.5bn, with 60% paid by the top fifth of households.
The think tank stated that Liz Truss’ plan to reverse the recent rise in National Insurance contributions “completely misses the target”.
Rishi Sunak’s proposal to repeat targeted lump sum “focuses help closer to where it’s needed most” but “relying on repeat payments exclusively to deliver support is risky given that they do not account for families’ differing energy usage.”
For example, an extra £650 payment would still fall £300 short of covering the higher-than-expected winter bills for a quarter of low-income recipients. “Furthermore, they do nothing for struggling families outside the benefit system. A household earning £1 too much to qualify for Universal Credit would miss out on £1,300 of support,” the think tank said.
“Significant additional support should be targeted at those most exposed to rising bills and least able to cope with them, and be watertight so that no-one falls through the cracks. But none of the proposals from the leadership candidates or the opposition parties currently do this,” Marshall said.
“An innovative social tariff could provide broader targeted support but involves huge delivery challenges, while freezing the price cap gives too much away to those least in need. This problem could be overcome with a solidary tax on high earners – an unthinkable policy in the context of the leadership debates, but a practical solution to the reality facing families this winter,” he added.
Watch: Why are gas prices rising?