You may well be fretting over how you will manage to pay your unprecedented bills this winter and praying the government acts sufficiently and swiftly to help alleviate pressure on your budgets.
Last month energy regulator Ofgem hiked the energy price cap for 24mln households by 80% to £3,549, with it coming into effect from the beginning of October.
More daunting increases are pencilled in for January and April 2023.
Nationwide forecast that Britain’s least energy efficient homes, those with Energy Performance Certificate ratings of F and G, could face bills of £7,000 from next month – a £2,700 uptick or £225 per month.
On the contrary, those in homes rated A to C will be paying £960 more a year or £80 per month, while the average rise for UK households is expected to stand at £1,250.
This makes the £400 offered to all homes, £650 for struggling and vulnerable households and the £300 for pensioners seem negligible.
Especially at a time when the Bank of England seems to be raising interest rates at every meeting – to combat 40-year high inflation of 10.1% - which sends mortgage payments rocketing.
Robert Gardner, Nationwide chief economist, said: “These increases in energy costs come at a time when mortgage interest rates are also rising.”
The BoE forecast that higher gas prices will push the Consumer Prices Index above 13% by the end of the year, while US bank Citigroup (NYSE:C) predicted inflation to hit 18.6% in January, the highest in almost half a century, while some experts are anticipating it to reach 20% as the energy crisis mounts.
So, this got Proactive thinking, what options does the new Prime Minister have to deal with the unseen energy price increases?
Decoupling prices
Energy UK, the sector’s trade body, proposed a plan on Friday it believes would save homes between £150 and £250 a year and £11bn for businesses - totalling a potential £18bn in total (read more).
The voluntary scheme would see the separation of the cost of electricity from sources including nuclear, solar and wind from the unprecedented prices being paid for energy generated by burning gas in power stations.
Adam Berman, Energy UK’s deputy director, commented: “The current energy market doesn’t allow customers to fully benefit from the cheapest form of electricity – domestically produced low-carbon generation.
“Removing the link between gas and retail electricity prices will be complex and take time, but this solution provides a quick fix for up to 40% of our generation capacity.”
In April, the European Union allowed Spain and Portugal to decouple the gas market from cheaper energy alternatives for 12 months.
Although it may not be so simple for the UK as approximately half of its electricity in 2021 was generated using gas, according to the National Grid (LON:NG).
Arjun Flora, director of energy finance studies, Europe, at IEEFA, commented: “Decoupling is something you could do but I think it's going to be less effective in the UK because Portugal and Spain are much less reliant on gas.”
Reducing energy consumption and reliance on gas
Capping the energy price cap simply imposes a maximum ceiling that households and businesses can pay rather than dealing with the gas crisis in the long term.
Lowering the UK’s reliance on gas would bring prices down as there would be a greater usage of cheaper alternatives.
“Cutting reliance on gas would really be the number one priority in my view because the gas price crisis is really what the issue is,” Flora said.
Not only this but reducing actual energy consumption would also drag prices down for homes and businesses.
“The fastest and most effective thing to do is the insulation of houses, as the amount of gas that you would burn in those houses would be much less and that really works, with roof insulation being the most effective way,” John Meyer, SP Angel analyst, said.
As well as cutting consumption and diversifying away from gas as much as possible, governments need to raise people’s awareness of energy-saving techniques.
“There needs to be a concerted campaign to persuade people to conserve gas and to make their homes more energy efficient,” Meyer added.
Ovo’s proposition
The founder of gas and electricity supplier Ovo Energy on Thursday outlined a proposition for the government to support the poorest homes in the UK, insisting it must be the new PM’s first focus when appointed today.
Stephen Fitzpatrick suggested a 10-point action plan that would see all households receiving financial aid, with help diminishing progressively.
“If we don’t use every available moment over the next 12 weeks to solve this, we are going to see a winter like never before, with people going hungry and going cold and the NHS being overwhelmed by the health impacts of the energy crisis,” he commented.
The UK’s third largest energy firm urged for the bigger charges faced by pre-payment customers to be abolished, labelling it a “poverty penalty.”
Ovo also wants the standing charge, which customers must pay even if energy usage is zero, to be ditched, claiming it is “the single biggest source of customer confusion on energy bills and causes the greatest resentment.”
Fitzpatrick also insisted the confirmed £400 support package for all households and up to a further £650 for people on qualifying benefits should be brought forward, with all payments being made before Christmas.
Abolishing VAT
Rishi Sunak vowed to cut VAT on all domestic energy bills if he were to be appointed as the next PM, which would be expected to save an average household £51 between October and December, costing the government £1.4 billion, IFS calculated.
Although the figure each home would save is so miniscule, in relation to the energy price threshold, that there are surely more effective methods to help alleviate the cost-of-living crisis.
“I don't think cutting VAT from 5% to 0% is really going to make much of an impact. It's more of a political thing,” Flora commented.
Reducing prices for consumers and businesses, however, is considered more of a short-term fix and it may have adverse impacts in the longer term.
“You kind of don’t want to make energy prices low for the consumer because they will have no obligation to reduce their use,” David Mirzai, SP Angel energy analyst, said.
Windfall Tax
Another way of decreasing the price of energy is to issue a windfall tax on large gas companies, which is levied on excessive, unfair and unexpectedly large profits.
The revenue generated from taxing huge profits would then be used to subsidise household and business’ bills.
Mirzai said: “Either you let the price run wild and then you tax the energy company, and you pay that out to consumers, which is kind of what they announced with the energy profits levy.
“Or the government lowers the price to the consumer by reducing tax.”
Freezing energy price cap
Last month, Keith Anderson, the boss of big six supplier Scottish Power, proposed a £100bn plan to freeze bills for everyone for two years.
Under his proposal, energy suppliers would cover the gap between the cap and the wholesale price of gas and electricity by borrowing from a “deficit fund,” arranged by the government through commercial banks.
What have we learned?
The energy price crisis is only set to worsen, with further hikes expected in 2023, unless the government can successfully intervene to help struggling households.
Several of the potential options are short-term fixes, with some likely to have a minimal impact given the magnitude of the price threshold.
Having spoken with energy analysts, there seems to be an overriding feeling that lowering gas usage and separating its price from those of cheaper alternatives would likely be the best methods for the new PM to adopt.
“The two best options, in my opinion, to deal with the energy crisis is cutting reliance on gas and decoupling the gas price from the power price,” Flora concluded, while Meyer concurred: “It’s all about reducing consumption and decoupling.”