We are about to see the biggest real-terms squeeze in living costs in a generation – and a major contributor to that is rising energy prices. The recent increase in the energy price cap will see average dual-fuel bills soaring 50 percent to almost £2,000 a year. Another significant hike in the autumn looks certain. And that’s before we factor in the impact of the unfolding crisis in Ukraine.
It’s a sign of the strange place we’re in that the price cap actually represents the best deal available to consumers right now – not something that was envisaged by those who designed it.
With energy prices front and centre in a cost of living crisis that’s set to get very real, I hosted a discussion recently with representatives from the energy sector and consumer groups, where we debated what could be done to help protect consumers – the first in a series of webinars on all things related to the energy transition.
Fuel poverty rising
So what did we conclude? The energy price rises coming down the pipe are “quite terrifying” in the words of one speaker – no one disagreed with that. The interventions announced by the government – a combination of rebates on energy bills, council tax and additional funding for vulnerable customers and those on low incomes – were welcomed, but in truth they will only take the edge off the impact and are a short-term “sticking plaster”.
For those on benefits and low incomes in particular, it was recognised that more help will be needed. The number of people in fuel poverty (defined as where more than 10 percent of available income after housing costs goes on fuel costs) is forecast to rise from 3 million pre-pandemic to around 6 or 6.5 million, according to a Fuel Bank Foundation report – a staggering increase. Benefits are set to rise by 3.1 percent from April (the rate having been set according to the CPI in September) – but inflation will be running at 7 percent or more. Salary increases for those in work are not keeping pace with inflation either.
In other words, the energy price rises we’re going to see will come at a time when many people are already significantly struggling. Bills will reach a magnitude where they’re not only problematic for the lowest earners – they’ll stretch many on average incomes too.
Factoring in Net Zero
Then there’s a further massive consideration – the imperative to manage a green transition for Net Zero, which will itself come with huge investment costs (with savings down the line).
These are not costs the private sector can stand on its own – they will require public investment too. So how can we square the circle and ease the pressure on consumers at the same time as raising funds to pay for decarbonisation?
Finding fairer ways to fund the transition
There was a fairly broad consensus in our discussion that one of the levers is to shift the emphasis from further levies on energy bills to general taxation. This was seen as a fairer and more socially progressive approach.
However, as we all know, tax rises are not a popular mechanism for most governments, so we’ll have to see how that plays out. Plus, there is investor confidence to consider. One of the reasons the UK has been so successful on offshore wind is that the subsidies have been supported by long-term contracts paid for by levies on energy bills. Making support for the green transition go head to head at each budget with schools or health spending is likely to reduce the confidence of investors that the funding wont change year by year.
We need a proper debate on energy retail
Certainly, whatever the government does, another key theme was that the retail energy market is in need of reform: the challenges we’re facing are not a one-off spike but indicate longer term shifts that need a structural response. The adherence to maximising competition and numbers of suppliers has not served customers well. The 30 or so suppliers that have gone bust over the past year have created several £bn in bad debts which now need to be paid off.
One participant observed that there had been no major new energy legislation since 2013 and hoped there will be an Energy Bill in the coming year. Ofgem and BEIS have been conducting reviews of the market – the time has come to set out a strategy for the future of the retail market that can help deliver affordable, clean energy for all consumers – domestic and businesses.
That’s quite a combination – and much easier to say than do! No one is arguing this is easy. But there were some points of common ground amongst the participants including: the need for a step change in energy efficiency; to double down on Net Zero, not back off; that fracking (as some have called for) is unlikely to be the answer; that there are fairer ways to pay for the energy transition that using energy bills; and that we have to look again at the benefits system, as this is a social policy, as well as an energy policy challenge.