Energy Bills 2022 - The Only Way Up - Forbes UK Consultant - Forbes

Energy Bills 2022 – The Only Way Up – Forbes UK Consultant – Forbes

It will not be a Happy New Year for those who have gas and electric bills to pay. Prices are rising sharply, and there is little chance of them dropping any time soon.

Here’s a look at why prices are so high, how the government, regulator (Ofgem – you’ll see that name often) and industry are responding, and what you can do to help reduce the pain those higher bills will bring.

How do you know the bills will go up?

It’s all about the price ceiling, which is set twice a year in April and October by Ofgem. Theresa May’s government introduced the cap in 2019 in an effort to quell growing anger over rising energy prices. Simply put, it limits the amount of energy energy companies can charge for each unit of energy they sell, and any fixed fees.

Ofgem uses wholesale energy price movements – what our suppliers pay for the energy they then sell to us – to set the cap level every six months. The theory is that by knowing how much to evade suppliers, the cap can be maintained at a level that does not allow excessive profits to be made.

But it is such a wholesale price increase that we already know, using Ofgem’s proprietary formulas, that the cap will rise by several hundred pounds in April (the exact number will be announced in early February).

The cap is currently £1,277 per year for a typical family in a dual fuel deal. Some energy chiefs say this could rise to £2,000, with a high probability of picking up next October.

Ofgem simply can’t keep the cap on consumer protections low?

Ofgem is bound by all kinds of rules that the government sets – until its political masters say otherwise, it will have to follow the mechanism that governs the way the cap is set.

The problem is that the mechanism is defective – or if you want to be gentler, it was never built to accommodate the spiraling wholesale prices we’ve seen in the past 12 months.

Max controls retail prices, but has no say in what happens in wholesale markets – it only responds to historical price data. Last October’s cap, which remained closed until next April, reflects price movements on the first of 2021. It has since been outpaced by rising wholesale costs.

This means that suppliers are paying more for energy than the ceiling allows them to charge us. Most energy companies operate at a loss, and for about 30 of them, losses have proven unsustainable, forcing them to go out of business.

This creates more problems. Certainly, customers of failed suppliers are transferred to another company by Ofgem, ensuring their continuity of supply. But it is undoubtedly a cumbersome process, and there are many reports of administrative hassles and billing discrepancies from those whose arrangements have been overturned due to disruption of their resource.

There is another sting in the story. Shifting several million customers around the market is a very expensive business, and those costs end up – as you might have expected – on customers’ bills. Estimates of the cost of managing the demise of 30 energy companies in 2021 range from £2 to £4 billion.

How about switching suppliers to lower bills?

This was an inadvertent tip for anyone with a hefty bill – bid and see if you can find something cheaper. Comparison sites like this one, financial journalists and Ofgem themselves have encouraged people to shop because there are always priced tariffs below the price cap.

But this is no longer the case. Such was the increase in wholesale prices that cap-level deals – which were previously towards the most expensive in the market – are now the cheapest. There is simply no alternative at a lower price, and the best option is to stay in place – which is why comparison sites have effectively stopped offering power-switching service.

So everyone is now paying the maximum price?

Not everyone. Those cheaper deals that were out there were often fixed-term, fixed-price contracts for 12 or 24 months. So if someone took such tariffs below the cap level sometime earlier in 2021, and their supplier did not go bankrupt in the meantime, they would still pay their original price.

But when their fixed term expires, their supplier will move them to a bargain priced according to the cap. Unless there is a drastic change in market conditions, we will all get there sooner or later.

But for many families, would the £2,000 bills be ruined?

they will. Indeed, millions of households are already struggling to afford their own energy costs, which have already increased by more than 20% in 2021. This is prompting the government to step in and take steps to reduce the impact of capping, or find another way to regulate the market so that suppliers remain viable, Most importantly, the bills remain accessible to everyone.

What can he do?

There are some options for the government to consider:

Cancellation of value-added tax on energy bills This would benefit clients at the expense of an already overburdened Treasury, so there would be political wrangling. But even if this gets the go-ahead, it won’t lead to a significant reduction in costs – the VAT rate on local energy bills is 5% (elsewhere it is 20% overall), so it would cut £100 off the 2000 bill pound.

Remove “green” fees and levies from bills The government requires energy companies to fund environmental initiatives, and these costs are passed on to customers. Abolishing this fee could cut another £100 off the usual household costs – but with the government committed to this green agenda, this could be politically sensitive.

Directing financial assistance to consumers The government can provide low-income families with money to pay their bills, or create a “social tariff” that is set at an affordable level and available only to those who meet the eligibility criteria. The big questions are how do you determine eligibility, and how do you inevitably fund such a system.

Support energy providers so they charge less There have been suggestions that the government could set up a fund for suppliers to tap into to maintain their ability to repay their debts without raising prices. Any money taken out of the fund can be paid back in the long term, hopefully, when market conditions become more benign.

Invest to make the UK energy self-sufficient If British suppliers were less susceptible to the mercy of international markets, their customers would be less vulnerable to price fluctuations. But for the UK to achieve self-sufficiency without relinquishing a commitment to net zero carbon emissions by 2050 will require massive capital investment in renewable energy such as solar, wind and wave power – and this is clearly a very long-term proposition.

So there is no magic solution?

no. If it is the case that sinister energy companies have been making huge profits at the expense of their customers, the regulator can step in and correct the situation. But as we’ve noted, companies are running at a loss, and there’s no fat left to trim. That’s why the coming weeks will see frenetic activity as authorities and industry struggle to find a solution to a looming crisis for UK energy consumers.

Are there any actions families can take?

With energy prices rising, it’s more important than ever to use less of it. This means better insulation to keep homes warm, turning off unused appliances and generally looking for opportunities throughout the home to reduce consumption.

Some of these may look like peeling cheese — just boiling the water you need, and taking a shower instead of a shower — but they can build up over the course of a year. And anything that helps reduce a potential £2,000 bill should be worth considering.

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