Tuesday briefing: How Ofgem’s new price cap drop will affect you this winter
In today’s newsletter: Despite a lower cap on energy bills, the cost of heating could remain crippling high and leave millions in fuel poverty
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August is coming to an end and as the days begin to get shorter and temperatures start to drop, many people are paying closer to attention to their energy bills, particularly those who struggled last winter. They may be pleased to hear that Ofgem has lowered its price cap by about 7%, from £2,074 to £1,923 for the average household. It should be cause to celebrate, even if the decrease is relatively slim. However, the news will probably be of little comfort for millions of people who could still end up paying extraordinary sums. How could that be? The government has rolled back its financial support that proved to be a lifeline for many last winter.
Bills remain considerably higher than before the energy crisis began, and experts predict that the cap will rise slightly again in the first quarter of 2024. To understand what the new price cap means in real terms, I spoke to Peter Smith, National Energy Action’s (NEA) director of policy and advocacy.
Last winter, 13m households tried to save on bills by not turning their heating on in cold weather, according to a Which? survey, and 10,000 homes a month were being pushed on to prepayment metres because of unaffordable bills, even with the £400 universal rebate scheme and the energy price guarantee. Without these safety nets, campaign groups and charities are worried that those in low-income and vulnerable households will suffer.
Why has the price cap fallen?
The announcement by Ofgem comes after wholesale energy prices fell to their lowest levels since December 2021, a welcome relief after 18 months of high energy prices. Russia’s invasion of Ukraine turbocharged already rising gas prices to unprecedented levels. Last summer, there were reports that the average household on a dual tariff and direct debit could face as much as £5,000 in annual bills. (In the end it peaked at £4,279.)
The reason the price cap will fall is largely a result of international markets diversifying their sources of energy after the reduction of Russian gas to mainland Europe and the UK after the outbreak of the war in Ukraine, Smith says. Unfortunately, the cap is still considerably higher than it was before the energy crisis began and is unlikely to help households in real terms all that much. “The situation for millions of households is still incredibly desperate,” says Smith. “When the price cap takes effect in October, we estimate that 6.3m UK households will be living in fuel poverty. That’s 2m more [than] at the start of this crisis.”
Will the price cap make much of a difference?
The average household that is paying by direct debit should be seeing a fall of about £150 a year in their bills, however, as the government has withdrawn its financial support over the course of the summer, millions of households could end up paying more than they did last winter. This is particularly concerning as record numbers of households already have significant energy debt as they head into the colder months. “They’re going to be carrying that financial burden as they try to pay off their existing usage at the same time,” Smith says.
Then there are standing charges, the fixed daily amount on your bill, which have increased significantly in recent years. They are expected to rise to more than £300. According to the NEA, standing charges for the typical customer have increased by two-thirds since the introduction of the 2019 Ofgem price cap as a way for energy companies to recover costs.
So even though energy bills will be cheaper than last winter, they remain unaffordable, especially as the cost of other basic essentials including rents, mortgages and food are higher than ever. Inevitably, the poorest families will be the worst affected.
“Often this results in households cutting back on essentials to the detriment of their health. People are now much more commonly sacrificing heating, as it is sadly increasingly seen as a luxury,” Smith adds. Alongside the human cost, there is a broader societal impact when people are forced into fuel poverty because of the strain it causes on health and social care services, he explains: “People are much more likely to spend longer in hospitals or are more likely to get sent back to the hospital. It creates a huge burden on the NHS.” In 2019, before the energy crisis began, the NHS is estimated to have spent £2.5bn on treating illnesses connected to damp and cold. Experts have said that rising fuel poverty levels will lead to a public health emergency that could be prevented.
Are there any alternatives?
The point of the energy price cap is not to keep bills affordable for consumers – it is designed to limit the profits of energy companies. Even Ofgem’s chief executive has questioned whether the price control mechanism is adequate, pushing the government to rethink the “very broad and crude” framework. Jonathan Brearley added that the price cap made sense in a more stable market, but the volatility of the current market has rendered it less effective.
Charities, campaign groups, experts and even some energy suppliers are calling on the government to create a social energy tariff, a discounted energy bill targeted at low-income and vulnerable households. Smith says that social tariffs existed in the 2000s on a voluntary basis; he attributes its limited success to the fact that it was not well targeted. “We believe it would be possible to learn from those previous mistakes,” he says. The NEA argues that this tariff must be additional to existing protections.
The government has announced that it is “developing a new approach” to protect customers from rising bills, but have seemingly abandoned any pledges to put a social tariff in place.
The chancellor, Jeremy Hunt, will consider a social tariff for energy bills in the autumn statement, although he made a similar pledge last year.
As households wait for the government to take action, people will continue to resort to desperate coping strategies to survive: “Last week we saw increased concern by fire and rescue services as people resort to other ways of heating their homes. A person set fire to furniture to heat his home. A pensioner used a disposable barbecue so they did not [need to] switch on their oven,” Smith says. This is why change is necessary, he says. “People are doing things that are ruinous to their long-term health and that put their lives at risk to survive.”
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WordiplySign up here for our daily newsletter, First EditionWhy has the price cap fallen?Will the price cap make much of a difference?Are there any alternatives?sleep deprivationCraille Maguire Gillies, production editor, newslettersEdinburgh fringeNimoquestions about wineCraille Helmut Newton’s infamous sexualised female nudesNimofailureCraillePrivacy Notice: GuardianMirrorTimesTelegraphiMailFinancial TimesSunThe final weeks of Yevgeny PrigozhinPjotr SauerMichael SafiSign up here for a weekly roundup of The Upside, sent to you every Sunday