Electricity and gas prices in the UK soared this spring after regulator Ofgem revised its energy price cap.
The cap, which sets the maximum amount a utility company can charge an average customer in the UK per year, has risen dramatically by 54% from £1,277 to £1,971. This means an increase of £693 per year for the average customer.
In response to rising wholesale gas prices around the world, driven by increased demand and reduced imports to Europe, the revision was implemented from 1 April 2022 and potentially places up to 22 millions of households against it and unable to meet their commitments.
Chancellor Rishi Sunak has since announced that £150 council tax rebates will be given to homes in bands A to D and as well as plans to offer a £200 rebate on bills.
A government-backed loan scheme of this order will cost around £5-6bn, well below the £20bn demanded by the energy industry, which has already criticized the announcements being tracked.
Ecotricity boss Dale Vince has previously called the measures “far too little, far too late”.
Responding to the House of Commons, Labour’s shadow Chancellor Rachel Reeves also called Mr Sunak’s plans a ‘buy it now, pay later scheme which drives up costs for tomorrow’.
How much do energy bills increase?
As of April 1, households currently on a standard variable rate saw their bills rise sharply by 54% or £693, from £1,277 to £1,971.
For around 4 million customers using prepaid meters, there was an increase of £708 from £1,309 to £2,017.
The new cap announced was calculated by Ofgem using a formula based on market prices and expected costs to suppliers.
What if I’m not on a standard variable rate?
Previously, people looking and deviating from standard variable tariffs could find deals for hundreds of pounds cheaper than the energy price cap. These agreements have now all been withdrawn as the cost of energy supply has increased.
When fixed-term agreements expire, customers will transition to a standard variable rate at the price cap level. The option to shop around is still available, but other deals will be more expensive, so customers are currently advised not to switch.
What alternative measures have been proposed?
Energy UK, the trade body for suppliers, previously called for VAT to be reduced from 5% to zero on household bills.
Companies pay 20% VAT on their energy bills and the government offers a rate of 5% to companies that use a limited amount of electricity. Businesses are not protected by energy price caps.
But in last October’s budget, Sunak resisted calls to cut energy taxes. Whitehall sources said at the time the cut would be poorly targeted, helping people who could afford to pay as well as those who will struggle.
Suppliers have also called for levies that fund investments in renewable energy and energy efficiency improvements to be removed from bills. The investment would rather be financed by general taxation.
They argued that it would be more progressive because those with higher incomes would contribute proportionally more. The levy is a tax on an essential good, which absorbs a significant part of the amount paid by low-income households.
E.On chief executive Michael Lewis, meanwhile, called for a “polluter pays” approach, which would have included a carbon tax hike to make up for money lost to bill levies. .
Suppliers estimate that removing green levies and reducing VAT to zero could reduce bills by an average of £250-300.
Energy UK has also suggested an industry-wide funding scheme to allow suppliers to spread the cost of gas price spikes and supplier failures over several years.
Right now, the price cap mechanism means that those costs will hit all of people’s bills next year.
Under the plan, lenders would provide funds to cover immediate upfront energy purchase costs, with the money being recovered over a longer period. The government would not guarantee the loans but would monitor the program to ensure there is no abuse.
E.On also called for a “more radical” approach and proposed that the government intervene to use public funds to reduce bills in the short term.
“As an example, this could mean that the government takes some or all of the cost increases onto its balance sheet, allowing these price spikes to be paid off later and reducing the immediate burden on consumers,” Mr. Lewis said.
A version of this approach has now been unveiled by Mr Sunak, although, as noted, not to the extent that vendors had hoped.
Dan Alchin, deputy retail director at Energy UK, pointed out that governments in other countries have provided direct support. For example, in Ireland households have pledged €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 on the table. We…
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This notice was published: 2022-05-25 15:59:19