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16 Aug 2022

Economy

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What is happening to energy bills? 

Households and businesses across the UK are facing a steep hike in energy prices as a result of the massive rise in the price of gas – and to a lesser extent oil – during 2022. This has been largely due to the actions of Russia – the world’s second biggest crude oil exporter and largest producer of natural gas – and its threat to halt energy supplies to the West following its invasion of Ukraine.  

Energy bills for a typical household are projected to reach an annual £3,430 in the autumn and surpass £4,000 at the start of next year according to research conducted by the consultancy Cornwall Insight. This comes as the energy regulator Ofgem confirmed it would update the energy price cap every three months, rather than every six, meaning that prices for consumers vary more frequently as a result of fluctuations in market prices. Ofgem has justified the move by saying it would allow prices to be cut more quickly if wholesale prices go down.

As for businesses, recent analysis published by SME Insights Report has revealed that the survival of thousands of businesses is threatened by rising energy costs. The government has yet to announce any specific packages to help businesses cope with soaring bills.  

Spiralling energy bills have been accompanied by a sharp rise in fuel prices, driven largely by sanctions against Russian oil and increases in the wholesale cost for petrol and diesel retailers as the pound falls against the dollar.  

Ofgem

 Who will be worst hit?  

While almost all households will feel the squeeze on energy bills, it will not be felt equally. Lower income households spend a far higher proportion of their disposable income on energy bills than richer households.  Moreover, since benefits are uprated in line with inflation, but in arrears, most benefits (including Universal Credit and the state pension) rose by only 3.1% in April 2022.  

Analysis published in July by the Joseph Rowntree Foundation (JRF) – using estimates of rising energy costs and including the impact of government policies to date – has shown that low-income households will spend 26 per cent of their income (after housing costs) on energy next year.  This despite the fact that benefits are expected to rise substantially in April 2023, reflecting the inflation rate in the year to September 2022. In some instances, families can expect to put two-thirds of their income towards gas and electricity. 

“While almost all households will feel the squeeze on energy bills, it will not be felt equally. Lower income households spend a far higher proportion of their disposable income on energy bills than richer households.”

Unless the government takes further action (see below) the result is therefore likely to be a significant rise in hardship for lower income households. 8.2 million households – one in three consumers – will be in fuel poverty by October 2022 because of the price increases, according to the charity National Energy Action. A household is considered to be in fuel poverty when it spends more than 10 per cent of its income on energy costs. 

In its UK Economic Outlook report, the National Institute of Economic and Social Research (NIESR) warned that rising prices would also impact household savings: 5.3 million households are forecast to have exhausted all their savings by 2024 and a further 1.7 million would have savings worth less than two months’ income. In addition, it estimated that 1.2 million families would be pushed into destitution (they use JRF’s definition of destitution as being unable to afford to buy the essentials to eat, stay warm and dry and keep clean) by the end of 2024.  

Welfare

What support has the government already given? 

The first government action on energy bills came in February 2022.  The Chancellor announced an Energy Bills Rebate worth £200 for around 28 million households, to be repaid in instalments over five years. A further £150 grant for all households in England living in council tax bands A-D was announced. A discretionary scheme ensured this funding was extended to those who did not qualify for the £150.  

There was not much further support announced in the Spring Statement, though the Chancellor did act to offset the impact of the introduction of the health and social care levy by raising the threshold for national insurance and taking 5p off fuel duty. 

In May, a £15 billion package of measures to support households was unveiled by the Treasury. Funded in party by windfall tax on energy companies, which it estimated would raise £5 billion in one year, the measures included a £650 one-off cash transfer for families on means-tested benefits – approximately 8 million people – paid in two instalments. The first, worth £326, was paid in July and the remaining sum is expected in the autumn.  

8 million pensioner households in receipt of the Winter Fuel Payment are also due to get an additional £300, while 6 million disabled people will receive a one-off £150 payment.  

“What further support might be offered is a contentious issue in the Conservative leadership race and the government has said any announcement should wait until there is a new prime minister.”

As well as the targeted support, all UK households will automatically receive a grant of £400 to help with their energy bills, replacing the £200 scheme announced in February after fierce criticism from opposition parties and campaigners. Under the new terms, not only was the rebate doubled but it will no longer have to be paid back.  This will be credited against bills in six instalments beginning in October 2022. 

Separately, it has also been reported that the government is examining plans to cut a further £400 off fuel costs. The current Chancellor Nadhim Zahawi is said to be looking into government-backed lending schemes for suppliers to help reduce the energy price cap from next year, although it is unclear whether the cost would ultimately be met by taxpayers or consumers through future bills.    

What further support might be offered is a contentious issue in the Conservative leadership race and the government has said any announcement should wait until there is a new prime minister.  However, that means any new action will be delayed until after Ofgem confirms the October price cap on 26 August and energy providers possibly start increasing direct debits to reflect the new cap in September.   

What are the two leadership candidates saying they would do?    

Both candidates are facing pressure to outline how they would support households meet rising energy prices, given that forecast price increases are now much larger than they were in May, when the last package of support was announced.  

Liz Truss has only proposed one specific action on energy bills so far: a commitment to scrap green levies on energy bills – designed to enhance the environmental sustainability of energy use– for both households and businesses. But these levies pay for other things – like the Warm Homes discount and energy efficiency schemes.  

Otherwise, she has sought to emphasise commitments to general tax cuts: she has pledged to immediately reverse the national insurance rise as well as abandon the scheduled increase in corporation tax. The foreign secretary has said her proposals for tax cuts and spending commitments would cost £30bn, though some experts have put the figure much higher.

Energy bills

These measures are unlikely to provide significant financial support to lower income households, since the vast majority of the benefits would accrue to businesses and upper and upper middle-income earners. Despite initially insisting that she was opposed to giving ‘handouts’ to help households cope with rising prices, Truss has since stated that she would not rule out support beyond tax cuts in an apparent U-turn.    

Rishi Sunak has now said he would remove VAT on energy bills. He has also committed to further targeted support for some households, confirming it would be along the lines of the package he announced in May – a combination of targeted support to lower income households and general support to all households facing higher bills.  

Sunak has also pledged that he would help households with insulation installation, pointing to the Green Homes Grant scheme that was launched by the government in 2020 but that was subsequently abandoned less than a year later after meeting only 10 per cent of its target. Finally, he has put forward proposals for a ‘buyers’ cartel’ on energy whereby a price cap for Russian energy would be agreed and has pledged to make the UK energy independent by 2045.   

How would they ‘fund’ it?  

Truss has said that, in the short-term, tax cuts will be funded from increased borrowing, although she has also stated that public sector debt will be on a downward track as a proportion of GDP within three years. She has ruled out imposing a further windfall tax on the profits of oil and gas companies which she says would ‘send the wrong message’ to businesses,  Sunak has stated he would fund his plans through ‘efficiency savings’ across Whitehall and criticised Truss’s proposed tax cuts, arguing that they risked unfairly passing on huge debt to future generations.                                                                                

Although both candidates have suggested that savings could be found from public spending, research from the Institute for Fiscal Studies notes that ‘choosing not to compensate departments for unexpectedly high cost pressures would be a deliberate decision to cut spending in real-terms, adding to pressures on the NHS, schools and other public services.’   

While, in the short term, any additional support is likely to be funded primarily by borrowing, over the longer term the public finances will need to be placed on a sustainable footing. The appropriate response will therefore depend on the extent to which the large energy price increases described above are prolonged or even permanent. Long-term support would come on top of other underlying upward pressures on public spending.  

leadership debates

Are there other options for helping people?   

Given current forecasts for energy price increases, the package of measures announced so far will not be enough to support households on the lowest incomes.   

The most efficient way to target financial support on those who need it most is the benefit system; a report commissioned by former prime minister Gordon Brown has urged the government to consider an emergency boost to Universal Credit payments. Universal Credit and other income-related benefits were cut very substantially in real terms over the 2015-20 period, and while there was a temporary uplift of £20 per week during the pandemic, this has now been removed. Brown has since called on the temporary nationalisation of energy firms unable to provide lower energy costs. Others have proposed an increase in the energy grant from £400 to £600 for low-income households.  

“The Labour Party have now also backed a freeze on the energy price cap until the end of March 2023, which would shield households against price rises anticipated in October and January.”

The Liberal Democrats have called for an ‘energy furlough scheme’ in which the government would freeze domestic fuel bills at their current level by absorbing the higher wholesale cost of companies buying energy, funded in part by a windfall tax on oil and gas firms’ profits, although the cost would almost certainly far outweigh any plausible tax revenues.  The cost would depend on future energy prices, but funding a £1,000 reduction in bills for each household would cost on the order of £28 billion.   

A similar approach was adopted in France, where the government capped the annual rise in energy bills at 4 per cent (though its largest provider EDF is largely state-owned, making such measures much easier than in a market system like the UK). 

The Labour Party have now also backed a freeze on the energy price cap until the end of March 2023, which would shield households against price rises anticipated in October and January. The plan is forecast to cost £29 billion, which Keir Starmer said would be raised by scrapping the proposed £400 discount on energy bills, backdating the windfall tax on energy producers to January 2022, and closing a tax relief loophole on the tax.  

There would also be a saving from reduced interest payments on government debt, because the policy would reduce measured inflation. However, Labour has not said what would happen after March 2023; if energy prices remain high, this policy would simply delay the rise in bills and in inflation. The party are also calling for a ‘green energy sprint’ to achieve energy security and insulate millions of homes across the country.   

make brexit work blog

Others have called for more radical structural reform to deal with the crisis, including decoupling the price households pay for gas from much cheaper energy from wind turbines and other renewables. Under pressure from energy suppliers, the government has said it would look into this in the future.  

What would the wider economic impacts of different support packages be? 

Either personal tax cuts or further direct support to households would increase overall household incomes and hence consumer demand, and might therefore add to inflationary pressures in the economy, although these impacts would be fairly small.  

In order to offset any such upward pressure on inflation, the Bank of England could increase interest rates – or increase them faster than they would have anyway. The net impact would therefore not necessarily be to increase inflation, but rather to redistribute income, from those who lose from higher interest rates, especially those with mortgages, to those who gain from fiscal support measures.   

By supporting consumer demand, fiscal support measures would also reduce the likelihood (or severity) of a recession, particularly if such measures were targeted on lower income households, who are more likely to spend such support rather than saving it. 

By Catrin Preston, UK in a Changing Europe. 

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