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Energy crisis: What can the government do to reduce soaring gas and electricity bills?

·6-min read
The government will reportedly hold “emergency” meetings with energy industry bosses to address rapidly rising wholesale gas prices (PA)
The government will reportedly hold “emergency” meetings with energy industry bosses to address rapidly rising wholesale gas prices (PA)

UK electricity and gas prices are set to soar this spring after regulator Ofgem revises its energy price cap in February.

The cap, which sets the maximum amount a utility company can charge an average customer in the UK per year, is due for its bi-annual review and is being tipped by experts to increase dramatically from £1,277 to as much as £1,995.

A response to climbing wholesale gas prices around the world, driven by increased demand and reduced imports to Europe, the review will be announced on 7 February and implemented from 1 April, potentially placing tens of thousands of households up against it and unable to meet their commitments.

Prime minister Boris Johnson is due to sit down with suppliers in the coming week to discuss what can be done to avoid landing consumers with unaffordable bills at a time when the cost of living is already rising and millions are having to work from home because of the pandemic.

A range of potential options are on the table, from cutting VAT on energy bills and scrapping green levies to direct financial support from the government, with Mr Johnson so far not ruling out help nor committing to any one particular course of action.

On Thursday, a Downing Street spokesperson said there are currently no plans in place to intervene but added: “Obviously we keep it under review, we are listening to those most affected.”

Speaking on BBC Radio 4’s Today programme, the chief executive of trade body Energy UK, Emma Pinchbeck, said: “Bills are going up so much that there is a wholesale price risk which impacts the whole economy and that’s got to be a government lead, as much as we can provide ideas.”

How much are energy bills expected to rise?

From 1 April, households that are currently on a standard variable tariff will see their bills rise sharply when the new energy price cap comes into force.

The new cap will be announced in February, and is calculated by energy regulator Ofgem using a formula based on market prices and expected costs for suppliers.

Experts forecast that it will jump from £1,277 per year for the average household to around £2,000 – an increase of more than 50 per cent. For around 4 million customers on prepayment meters, the price is likely to be slightly higher still.

What if I’m not on a standard variable tariff?

People who shop around and switch deals away from standard variable tariffs were previously able to find deals for hundreds of pounds cheaper than the energy price cap. Those deals have now all been withdrawn as the cost of supplying energy has gone up.

When fixed-term deals expire, customers will be moved to a standard variable tariff at the price cap level. The option to shop around is still available, but other deals will be more expensive, so customers are advised not to switch.

What measures are being proposed?

VAT cut

Energy UK, the trade body for suppliers, is calling for VAT to be cut on household bills from 5 per cent to zero.

Businesses pay 20 per cent VAT on their energy bills and the government offers a 5 per cent rate for firms that use a limited amount of electricity. Businesses are not protected by the energy price cap.

In October’s budget, the chancellor, Rishi Sunak, resisted calls to cut VAT on energy. Whitehall sources said at the time that the cut would be poorly targeted, helping out people who could afford to pay as well as those who will struggle.

Green levies

Suppliers want levies that fund renewables investment and energy efficiency improvements to be removed from bills. The investment would instead be paid for from general taxation.

They argue that this would be more progressive because those on higher incomes would contribute proportionally more. The levy is a tax on an essential good, which takes up a significant part of the amount paid by low-income households.

E.On’s chief executive Michael Lewis has called for a “polluter pays” approach, which would include an increased tax on carbon to make up for the money lost from levies on bills.

Suppliers estimate that scrapping green levies and cutting VAT to zero could reduce bills by £250 to £300 on average.

Spreading costs

Energy UK has suggested an industry-wide financing scheme to allow suppliers to spread the cost of gas-price spikes and supplier failures over several years.

Currently, the price-cap mechanism means that these costs will all hit people’s bills next year.

Under the plan, lenders would provide funds to cover the immediate up-front costs of buying energy, with the money recouped over a longer period. The government would not guarantee the loans but would oversee the scheme to ensure it is not abused.

Government funding

E.On has said that a “more radical” approach may be needed. It proposes government stepping in to use public funds to lower bills in the short-term.

“As an example, that could mean the government taking some or all of the cost rises onto its balance sheet, allowing these sudden price spikes to be paid back later and reducing the immediate burden on consumers,” said Lewis.

This is likely to be a tougher sell to government, with ministers indicating they do not want the state to be more involved than is necessary.

Dan Alchin, deputy director of retail at Energy UK, points out that other countries’ governments have provided direct support. For example, in Ireland households have promised €100 (£84) off their first energy bill in 2022 and in Italy the government has provided loan facilities to suppliers.

“Right now, nothing should be off the table. We need the UK government to engage with industry and finding a way through this that helps customers,” Alchin said. “They have not responded as quickly as Treasuries in other countries.”

Why are energy bills going up so much?

Gas imports to Europe have been lower due to the global economic recovery which has caused increased demand in Asia. Protracted cold spells over last winter and into spring, have led to lower-than-normal amounts of gas left in storage across Europe.

The UK imports around half of its gas and is more reliant on the commodity to heat homes than many European countries which predominantly use electric heating systems.

Continued low imports and the need to re-fill gas storage sites for next winter has driven gas demand and caused forward gas prices to rise further.

Russia has also been accused of limiting its supplies of gas into Europe to exert political pressure on EU governments. The Kremlin wants governments to approve the opening Nord Stream 2, a gas pipeline from Russia into Europe.

Wholesale electricity prices have also been pushed up by higher gas prices and an increase in prices for carbon allowances.

Consumers will also have to cover the costs stemming from failed suppliers, some of which failed to hedge their exposure to volatile gas prices by buying enough energy in advance.

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