UK electricity and gas bill rises - price cap alarm bells must be heeded : Ian McConnell

Meanwhile, the Financial Times last week published projections conducted on its behalf by consultancy EnAppSys, looking ahead to the following biannual review, suggesting the price cap could from October be as much as £2,400, nearly double its current level.

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These numbers all speak for themselves. What experts are predicting is an enormous increase in household energy bills for the huge numbers of people on standard variable tariffs. Experts have also highlighted the dearth of attractive fixed-price deals on the market from suppliers amid the UK’s current energy price crisis.

It is a grim situation. For months, it has seemed like a ticking time-bomb that cannot be defused, with the mechanism for calculating the price cap seemingly making a huge hike in bills an inevitability.

While there is likely more certainty around the projections for next month’s review of the price cap than for the following one which would take effect from October, the forecasts are in the round nothing short of alarming.

Of course, the scale of the developing woe has been obvious for months to many, including policy-makers.

In these most difficult of times, it is absolutely the last thing anyone needs right now.

Many households already struggling under the weight of the fall-out from the pandemic will be unable to afford such huge increases in their energy bills. The number of people in fuel poverty, a predicament which is entirely unacceptable at any time in a developed economy such as the UK, will spiral from already grim levels.

In a macroeconomic context, discretionary incomes will be cut significantly across the board, weighing heavily on consumer spending and on the UK’s ability to mount a recovery.

UK consumers of course do not need to be reminded they are in a more general cost-of-living crisis, of which the energy bills aspect is a major element. Petrol prices have surged and, apart from energy-related costs, the rise in inflation has been very broadly based. What is more, the inflation situation is expected to get worse in the short term.

Annual UK consumer prices index inflation surged from 4.2% in October to a 10-year high of 5.1% in November. Annual inflation was 3.1% in September.

The Bank of England now expects annual CPI inflation to reach around 6% in the spring – a figure that would only months ago have been almost inconceivable and would be 15 times the 0.4% figure recorded for February last year.

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Not surprisingly, the UK’s energy price crisis has fuelled intense political debate.

This has been wide-ranging, and has understandably taken in how we got to this stage in terms of government policy.

It always looked at the time of Centrica’s decision to close the giant Rough natural gas storage facility off the east coast of England, a move that took effect in 2017, that the resultant increase in the exposure of the UK to spikes in wholesale gas prices would not be a good thing. The Conservative Government at the time seemed remarkably relaxed about the situation. This was surprising given the storage gave the UK and its household and business energy users at least some insulation from the dramatic spikes in wholesale gas prices on the international markets, which policy-makers should know are all too common. The Conservatives’ stance on gas-storage capacity, and general failure to help ensure adequate security of UK energy supply in policy-making, is utterly lamentable. The Rough facility looked like a sad loss then, and still does now.

Energy is a reserved matter for the UK Government, and it must shoulder significant blame for the current state of affairs. However, the Scottish Government has some key decision-making power in this area, such as its right to refuse consent for new nuclear power stations.

There has been a renewed focus, following the recent closure of Hunterston B, on the Scottish Government’s opposition to the building of new nuclear stations. The question of whether there should be new nuclear plants in Scotland is most definitely a matter for proper examination and debate. In the past, the building of such stations was enabled by public-sector ownership and the ability to plan on a long-term horizon. The landscape is very different now, and the considerations more challenging as a result, but that does not mean the matter should not be looked at, with an open mind.

There have been calls for value-added tax on household energy bills to be removed, at least temporarily.

This would be a major policy move, and would be very expensive for the Exchequer.

Observers have noted Prime Minister Boris Johnson suggested in the past that VAT on energy bills could be scrapped following Brexit. He seems now to have backed away from that stance.

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In any case, the sorry fact of the matter is that even scrapping VAT on energy bills when the new cap comes into effect would make relatively little difference. The VAT rate on energy bills is 5%. The VAT element of a bill equivalent to the current annual £1,277 price cap for a typical standard variable tariff customer would be only around £61.

For a bill equivalent to the projected £1,925 price cap for such a household after next month’s review, the VAT element would be about £92. This is less than one-seventh of Cornwall Insight’s forecast rise in the price cap for a typical dual fuel standard variable tariff customer from April 1.

Winter fuel payments of £100 to £300 to people who receive the state pension, and the £140 warm home discount on energy bills for people receiving the guarantee credit top-up element of pension credit and some low-income households are also much smaller than the projected hike in household fuel bills. These payments are obviously, crucially, required by many people to pay for their energy bills at current levels. And comparison of these amounts with the projected rise in bills shows just how intractable this problem is, given it seems unlikely the UK Government would double, treble or quadruple such payments.

French President Emmanuel Macron sent shares in Electricite de France tumbling last week when he stuck with a commitment to cap increases in electricity bills at 4% this year.

It seems clear the UK Government will have to do something to ease the huge pain for millions of households of the impending surge in energy bills.

The big question, however, is how much it will do, given the enormous amounts of money that would be required to mitigate the situation properly. It is a difficult predicament, but the Tories must act in a meaningful way to cushion the blow for consumers, as a matter of urgency. There has been talk of a government-backed fund and a smoothing mechanism, to avoid a cliff-edge, but the danger is that this would prevent households getting relief if wholesale energy prices drop sharply in future, given the need to balance out previous rises not having been passed on in full if such an arrangement were set up.

There are clearly short-run and long-term issues.

The short-term issues must be dealt with speedily, without procrastination by the Johnson administration, and with actual measures rather than spin, as well as a particular focus on the households which will not be able to afford huge increases in their bills.

There are also, clearly, massive longer-term issues to be worked through. Right now, the Tory energy sector privatisation bonanza looks like it has been anything but a success, and efforts to introduce competition in the household supply market through a raft of new entrants lie in tatters.