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Today’s announcement that the energy price cap is to rise by 80%, means that a typical household can expect to be charged £3,549 for their gas and electricity from October. Although the price cap is a means of restricting the profits of fuel suppliers, rapidly rising wholesale costs (which the regulator, Ofgem, reviews on a quarterly basis) are driving the cost of energy ever upwards. Reputable forecasts indicate that these could reach £6,600 by Spring next year.
Typical costs of nearly £300 per month now, and £550 per month in 2023, will simply not be affordable for many. According to Bank of England measures of household disposable income (released in last month’s Financial Stability Report), the very poorest 10% of households are already spending 90% of their gross incomes on essentials. There is simply no way that those will be able to cope with the rising cost of fuel this Winter.
But it is not just the very poorest we should be concerned about. According to the latest ONS data, for 2020/21, spending on fuel accounted for around 5% of post-tax income amongst the lowest half of the income distribution that year[i]. Since then, typical fuel bills have risen three-fold and by Spring next year they could nearly double again. That means, within the next six months, half of all households will be spending 30% of their post-tax incomes on fuel costs alone.
And, of course, rising energy costs will feed through to other parts of the household budget too – as businesses pass on their own increased costs to consumers.
Energy debt, prepayment meters, and wider implications
Unless action is taken, the immediate impacts will likely be witnessed in a huge rise in debt owed to the energy companies. As we have previously noted, the ability of households to borrow from other sources to pay their household bills, or reduce their non-essential expenditure, are both severely restricted. This will have four effects:
Firstly, energy suppliers will be at risk of going bust. To survive they will need to secure cheap loans to tide them through a revenue crisis. This is why Scottish Power has made a direct appeal to Government for the creation of a £100 billion ‘deficit fund’, which would allow them to hold down prices in the first place[ii].
Secondly, households who are in debt will face actions to collect this. For those not already on prepayment meters, unable to cover the ongoing cost of their energy, or to suffer cold, dark, Winter nights, the debt collection process is likely to involve being told a prepayment meter will be put into their home. Although Ofgem requires that suppliers offer affordable debt repayment plans prior to doing so, it is unlikely that many households will be able to meet the cost of their ongoing use, let alone repay their debt. However, the sheer volume of debt may render the process of installing prepayment meters impossible for the companies to implement. This is the basis of the Don’t Pay Campaign[iii], which seeks, ultimately, to bring debt collection processes to a standstill and force the Government to intervene. But whether people who can pay choose not to do so, there is likely to be such a huge rise in debt levels that collection processes could break in any event.
Thirdly, and critically, for those households who already have pre-payment meters installed in their homes, there will be little option but to turn off the lights and heating. In 2019 there were around 4 million households (about 14%) with prepayment meters in their home, and an Ofgem survey that year revealed that about one in seven of those had “self-disconnected” in the previous 12 months. Whilst most of these went without electricity or gas for relatively short periods of time, the rising cost of fuel will inevitably extend both the numbers in this position and the duration of their hardship.
Finally, there will be knock on consequences – for health and for the payment of other household bills, including rent and Council Tax, and for the repayment of other non-priority’ debt, including credit cards. As we noted at the start of this month, this could have wider implications for the stability of the financial system. It will certainly have severe implications for social housing providers, and local authorities, including in respect of greater homelessness[iv].
Radical action is needed
To address this crisis, policymakers need to think radically and act quickly. The best solution is to hold down energy prices. But doing so will require a huge amount of subsidy, as Scottish Power have indicated. They cannot absorb rising wholesale prices without this. Some commentators have proposed the nationalisation of energy supply, but whatever the wider arguments concerning nationalisation, any state owned energy supplier would also require a huge subsidy in order to hold prices down to a reasonable level.
For this reason, last month, we proposed something very similar to Scottish Power’s plan. However, we argued that the Bank of England could intervene to create a ‘a long-term funding facility’ for energy suppliers, social housing providers and local authorities, which would allow these to set fuel prices, rents, and Council Tax at the expected long-term average’ rather than in response to the short-term inflationary environment.
Unlike Scottish Power, we also called for the interest to be as low as possible, and require those accessing the Fund to make clear, binding, commitments to hold down prices over the period of the loan. We also called for measures to be put in place to prevent profiteering. These could, for example, include the prohibition of dividend payments to shareholders until the loan was repaid. In contrast, Scottish Power are seeking Government guarantees on commercial loans from banks, without any such commitments.
We still consider a Bank of England loan facility to be the best approach to take, as it would have a major, and immediate, impact on inflation more generally. However, the more targeted option of a social tariff for those on lower incomes, as advocated by Fair by Design, would also have our support. Whilst not achieving the same level of impact on inflation, a social tariff could certainly mitigate the worst of the oncoming energy debt crisis for many.
However, we believe there is also an urgent need to review the extent to which prepayment meters are being used in the UK. Problems of "self-disconnection" are not new and imposing the rationing of access to fuel based on income runs counter to the United Nations Sustainable Development Goals. Although previous studies have found that prepayment meters have assisted some to become more conscious of their energy use, and helped some customers to budget more effectively, the current crisis is exposing how a widespread prepayment infrastructure could result in the exclusion of lower income households from energy supply altogether.
Other nations don’t appear to be as keen on prepayment as the UK. For example, in Germany fewer than 1% of households pay for their fuel using prepayment meters, and last year their Parliament also prohibited disconnections for customers whose arrears were less than one sixth of their annual bill. In the US also, there are much stronger consumer protections to ensure ongoing access to supply and far fewer prepayment meters (relative to population) in place as a result.
Ultimately, the crisis is revealing the need for an overhaul of the UK's energy market. That will, of course, need to consider environmental as well as social and economic objectives. Whilst we are not focused on environmental policy, greater use of renewables, combined with improved insulation appears to us to be a far better means of reducing use than requiring those on low to middle incomes to go hungry in dark, cold, homes. This seems like a good time to start getting rid of prepayment meters.
[i] CfRC calculation, derived from Table A6, ‘Family Spending Workbook 1’, and Table 14b, ‘The Effects of Taxes and Benefits on Household Income, UK, 2021’, Office for National Statistics.
[ii] See ‘Scottish Power’s £100bn plan to freeze energy bills for two years’, https://www.bbc.co.uk/news/uk-scotland-62645441
[iv] This is already rising, see ‘Soaring UK rents leave tenants facing eviction and homelessness’ Financial Times, 26th August 2022
