Energy bills in Britain are soaring

OAugust 26th Ofgem, Britain’s energy regulator, confirmed what had long been predicted and feared. It reset the energy price cap, or the default tariff rate that most pay—and the average household’s monthly energy bill will rise from around £164 ($194) now to £296 (equivalent to £3,549 a year) on October 1st (see chart ). Projections for 2023 are even scarier. On the basis of wholesale prices for natural gas (which is burnt both to heat homes and to generate electricity), Cornwall Insight, a consultancy, forecasts that bills will rise to £449 in January and £551 in April. The Resolution Foundation, a think-tank, says that in January households with pre-payment meters—who are usually poor—may face average bills of more than £600.

The government has already said it will provide some help with energy costs. But the next prime minister (likely to be Liz Truss, now the foreign secretary) will be under great pressure to do more after taking office early next month. Without further support, the Resolution Foundation estimates energy bills this financial year would swallow at least 14% of spending among the poorest fifth of households, double the share before the pandemic.

But handing out help involves some nightmarish trade-offs. Paying cash only to the poorest households is cheapest, but some people in genuine need may miss out on help. Broad-based assistance is the surest way of making sure no one has to choose between heating and eating, but is expensive. Capping prices makes bills more affordable all round, but supports demand just when it should be squashed. So far the British government has let high prices discourage energy use, while providing some cash support to the poorest households. Other European countries have been much more willing to control prices and cut energy taxes. The French government, for example, has limited electricity-price increases this year to just 4%.

As prices rise, so do both the cost of protecting the poorest and the number of people needing help. The Institute for Government, another think-tank, calculates that topping up the support package announced by the government in May only for those on benefits, pensioners and the disabled, to compensate for the increase in expected energy prices since then, would cost £6bn -8bn. With prices looking unlikely to fall soon, the costs of support to these groups will only mount. But even households in the middle of the income distribution are starting to struggle. After adjusting for housing costs and family size, energy bills will swallow 9-10% of their spending. A separate survey suggests that only around 70% of them have enough money to hand to cope with a large, unexpected expense.

Even help intended for those who most need it can easily miss its target. It is not uncommon for bills to be 30% lower or higher than the average for a “typical” household. And the Resolution Foundation estimates that only around 50-60% of the poorest fifth of households (after housing costs) actually receive means-tested benefits.

The foundation suggests that help could be more accurately aimed if payments through the benefits system are linked more closely to family size and if those below a certain income threshold could apply for discounts on their energy bills, using tax data as proof of their low earnings. Alternatively, it suggests freezing prices, raising taxes on the rich to pay for the subsidy. The next prime minister will have less than a month after taking office before bills leap. Whatever she or he decides, energy has become much costlier. The burden must be shouldered. How will it be shared?

Leave a Comment

Your email address will not be published.