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LONDON – The expected increase in energy prices in the UK this winter is being treated as a national emergency, posing a financial threat at least as large as the coronavirus pandemic.
The upcoming increase in the limit set by the regulator on consumer energy bills is anticipated to spur majority of households falling into poverty and causing budgetary stress that can affect industries such as hospitality, tourism and retail.
On Wednesday, consulting firm Auxilione released revised forecasts for the limit most energy providers are charging, predicting a current increase from £1,971 ($2,348) a year to £1,971 a year. £3,635 for three months from 1 October.
In the following quarters, it said the limit could hit £4,650 and £5,456 without intervention, more than a fifth of average UK income.
The average household paid £1,400 for their energy in October 2021.
Why are energy prices rising so much?
Global wholesale electricity and gas prices have increased in 2021 due to higher demand as economies reopen after the Covid-19 lockdown, and like competition for enhanced inter-regional supplies.
Russia’s invasion of Ukraine in February then led to cut gas supplies to Europepushed European natural gas prices to record highs and sent electricity prices up.
Although the UK gets only 3% of its gas from Russia, compared with around 35-40% for the whole of mainland Europe, the country is connected by pipeline to the rest of Europe and is a major supplier. net imports.
The UK has particularly high gas demand, as it has a larger share of gas-heated homes than most European countries and generates about a third of its electricity from burning natural gas.
Joanna Fic, senior vice president at Moody’s, told CNBC: “The impact is exacerbated by high electricity prices in Europe, where drought conditions have affected hydroelectric plants and power outages. unplanned reduced France’s nuclear output.
Debate about price limit
Since the start of 2021, 31 UK energy companies have collapsed due to skyrocketing wholesale prices, with their customers being diverted to other market participants.
Remaining suppliers are offsetting the cost of the extra energy they need to buy through household bills, adding £69 to the most recent April price cap of £1,971, which lasts for six month. From October 1, the cap will run for a period of three months to reflect greater volatility.
As well as destabilizing businesses that already lack enough insurance for their energy purchases, price caps – which have made Britain somewhat more optimistic in how to deal with energy prices – have been seen as inappropriate. suitable for the purpose of not stopping the current attractive price increase. for consumers.
According to regulator Ofgem, the limit was introduced in 2019 to prevent consumers who do not frequently switch providers from facing excessive fees, rather than prevent an overall price increase caused by markets. regulated wholesale market.
Could more vendors collapse?
Nicolas Bouthors, equity research analyst at Paris-based AlphaValue, told CNBC that a few bankruptcies in smaller companies are still possible this winter, but it’s likely all or Most will weather the storm.
“The weak suppliers are gone and the strong ones remain” after the recent turmoil, he said.
However, it is certain that millions of people will struggle to meet their bills at the current predicted price cap (official numbers will be announced by Ofgem on August 26).
So far, the government has announced a one-time £400 grant to help all households with bills, with an additional £650 payment to households already enjoying benefits. vehicle checks and £300 for pensioners.
However, based on updated projections, this currently looks “very modest,” Moody’s Fic said, and will still leave many households struggling with affordability, and utility services. – many of which operate with low margins – face the risk of increasing bad debt.
Urgent need
Despite the public, commentators and politicians arguing that much larger measures are needed to avert an unprecedented crisis over the winter, the candidates for the next British prime minister, Liz Truss and Rishi Sunak, had a mutual dispute’ plan to solve it.
Both say it is necessary to wait until a new price cap is confirmed by Ofgem and that the measures will only be confirmed after the leadership election ends next month.
Nathan Piper, head of oil and gas research at Investec, told CNBC: “The scale of the problem – similar to Covid in terms of its financial impact on the entire population – requires government intervention. “.
While those who like Centricaowner of British Gas, has been criticized for not doing more for consumers after healthy reporting profit In the first half of this year, Piper said the sector as a whole couldn’t take the kind of loss it needed to offset the increase in wholesale prices, which could remain elevated for years.
“For those with the greatest hardship, suppliers will be flexible in payment, but there is a limit to how much damage they can take because you want a healthy energy sector when the crisis comes.” This crisis is over and you want suppliers.
“Short-term hits to supplier margins can be useful for a while, but they need to stay healthy enough to last during this period, when you obviously have too many suppliers. strong enough before.”
Ultimately, Piper said the government will need a plan to either fix energy prices at their current levels and cover the difference to suppliers, or raise energy price ceilings and supply households. a discount.
Possible action
So far, Sunak says he will cut sales tax on energy bills and find £5 billion in support for lower income households, potentially through an extension of time. recently announced deadline wind tax about energy companies
Truss has said she could exclude “high earners” from the £400 payment, and has focused her message on introducing broader tax cuts and suspensions. green tax on energy bills.
Meanwhile, the opposition Labor Party said it would freeze the current price ceiling by extending the import tax and finding other savings.
The scale of the current emergency has also led to debate over the potential for re-nationalization of the energy sector, or temporary nationalization of energy companies that cannot bring down prices, such as by former Prime Minister Gordon Brown.
Some, including Bill Bullen, CEO of Utilita Energy, have argued that any additional support package should target lower-income households; others say the scale of the problem calls for the widest possible safety net.
Centrica and Octopus, a renewable energy consortium, are said to have discussed with government ministers a plan to get a funding package from commercial banks that would allow them to freeze the current price ceiling and make money back in the long run through a surcharge on the bill. .
Rebecca Dibb-Simkin, director of marketing and product at Octopus, told CNBC the company received £150 million in cost increases on behalf of its clients and is handling 40,000 calls a day. She said that while the company is well supported by pensions, energy and investment giants, more government support is needed for the sector as the crisis continues, especially especially in winter.
Octopus report an operating loss of £1 million in the UK energy retail business for the full year 2020-2021.
‘It was a mess’
AlphaValue’s Bouthors says the plan launched by Centrica and Octopus will be desirable for suppliers as a way to get remunerated for current costs and avoid additional taxes.
“But it also needs leadership and guidance from politicians, and now we are still waiting for the next prime minister,” he said.
While Bouthors said the UK’s current situation was “certainly” insufficient, he said he believed a plan would eventually emerge as it has in other countries.
“Every European country has found a solution, either through free cash or transfer tax, so I think the balance will be found in the UK,” Bouthors said. “But now it’s a mess, and very complicated.”
