The energy price cap goes up and up: why is this and what can we do?

renewable energy suppliers

Energy prices are rising very fast: we all know that. Why is this, what is the role of Ofgen and the energy price cap, what might happen next and what can we do about it?

The energy price cap (EPC) was introduced in January 2019. In the words of Electricity Prices (“an independent information and pricing comparison service for domestic homes and businesses”) this is “a limit on the maximum price that a supplier can charge its customers per unit of energy used and also sets a maximum daily standing charge (the cost of connecting your home to the national grid).” It was intended to manage a familiar tension in a market economy, that between a small number of private companies that control an essential resource and the people who use and pay for it. For a couple of years it worked well – perhaps too well. Now, it and Ofgem, which administers it, are centre-stage in a global crisis which was perhaps not envisaged when the system was set up.

For the first three years, the EPC (which is re-set every six months) gently rose and fell, perhaps giving the impression (in so far as people thought about it at all) that all was well and the that Ofgem was on top of the situation. It’s important to remember that there’s no element of subsidy involved: Ofgem sets the cap based on, as Channel 4 News suggested on 2 August 2022, “a fine balancing act…set it too low and energy providers could go bust…set it too high and consumers could be plunged into poverty…”

It could even be argued, as Electricity Prices points out, “that the cap has distorted the market, based on the fact that when the cap was first introduced, prices fell dramatically between April 2019 and October 2020. When the price cap rose in January 2021, the cheapest market deals weren’t far off the capped rate of £1,138. These unrealistically low prices supported the agenda that customers were getting a good deal.” Now that wholesale prices have sky-rocketed, the EPC still tries to flatten the curve but ultimately must follow it. In the process, it is perhaps getting the blame. This article from Energy Helpline also gives a good summary of how the EPC has performed.

Why have energy prices gone up?

Why have prices gone up? Channel 4 News blames this on a “perfect storm,” an increasingly used term in these troubled and interconnected times. The factors include some false assumptions about demand patterns, cold winters in Europe and warm summers in Asia (which increased energy consumption on heating and air-conditioning respectively), lower energy reserves, low wind-energy output (in the UK at least), the fact that although renewable energy production has broken several records in the last couple of years it’s still not where we need it to be and the vast raft of predictive uncertainties caused by Covid and the recovery from it. To this was added in early 2022 Russia’s invasion of (or special military operation in) Ukraine. Russia provided 40% of the EU’s gas in 2021: perhaps exactly as Putin intended, the inevitable sanctions have reduced supply and increased costs to an extent which has enabled him to wage his war personally with every energy-consumer in Europe.

The UK is less dependant on Russian gas than is the EU (3% compared to 40%, according to Metro). While that may be good news for continuation of supply, as The Guardian explains, “the privatisation of UK supplies in the North Sea ties consumers to the going rate on international energy markets, leaving the UK as exposed as any other country to rising prices.” We are, it seems, all in this together.

What should the role of a regulator be?

All of this raises the issue of what the role of a regulator should be. There is no magic wand, money tree or crystal ball to assist its work: but questions are already being asked about Ofgem’s (and thus the government’s) role. Aside from managing the EPC, Ofgem is also responsible for allowing new energy companies to start operating. On one level, more is better and free-market orthodoxy states that the greater the number of players, the lower the prices. There have been times and sectors where this has worked: but it seems that the energy market in the last few years is not amongst them. 29 energy retailers went bust between July 2021 and May 2022, and Citizens Advice has claimed that consumers who suffered from this paid £30 a month more on average as a result. Neither of these statistics provide an inducement for new companies to enter the market in these uncertain times nor for consumers to switch to them. Organisations with significant economies of scale seem, once again, set to dominate. God is, as Voltaire observed, on the side of the big battalions.

What can be done about rising energy prices?

The next decision on the EPC will be in October and it seems like more bad news. What can be done?

Don’t Pay UK Campaign

One response to the crisis is the Dontpay.uk campaign which is “demanding a reduction of energy bills to an affordable level. Our leverage is that we will gather a million people to pledge not to pay if the government goes ahead with another massive hike on 1 October.”

There are serious consequences to cancelling your direct debit to a utility company (as outlined by Citizens Advice West Berkshire below) and this statement by Dontpay.uk shows how the role of Ofgem in administering the EPC has become interpreted as the government controling energy prices: which it doesn’t. The question for the government is a political one, involving whether it wants to subsidise energy bills. Liz Truss, the likely victor in the Conservative election, had previously ruled this out, claiming that tax cuts were a more effective solution, although her recent statement that she has, as reported in The Guardian, “denied she is ruling out providing extra help with energy bills beyond tax cuts” is seen as being “the beginnings of a U-turn on the issue.” Whoever is elected in early September will have about three weeks to come up with a plan to address this crisis (or a compelling reason for not doing so).

It certainly seems set to become a political rather than a consumer issue. Dontpay.uk tells us that “mass non-payment is not a new idea: it happened in the UK in the late 80s and 90s, when more than 17 million people refused to pay the Poll Tax – helping bring down the government and reversing its harshest measures.” Various contemporary accounts, including the BBC, Libcom.org and The Guardian, have different (and generally lower) figures for this, but it’s beyond doubt that the poll tax protests were a significant factor in Margaret Thatcher’s downfall. An irony is that, because of the number of people who wrongly believed that not registering to vote would prevent their being liable for the poll tax, it may have helped John Major win the 1992 general election.

This shows the risk of unintended consequences of politicising an issue that isn’t really political, certainly not in the way the poll tax was. True, it’s up to our new political leader to mitigate this, directly or indirectly: but it was not caused by an act of political will. Comparing the two seems dangerous and perhaps unhelpful.

Careful energy usage

There are ways we can make things better but these involve some sacrifices. We can no longer pretend that there is an unlimited, affordably supply of energy from a hole in the ground on the other side of the world. Wind turbines and solar farms, perhaps in places where we would prefer to see empty countryside, are necessary if we want to continue our current way of life. There needs to be a predisposition in favour of these in planning decisions (even at the risk of a few errors), particularly if these will provide community benefits rather than merely personal profits.

The current energy-price crisis is a symptom of our continued reliance on non-renewable and non-local energy sources. These are inevitably dominated by a global market over which we individually have no control. In a fairly windy, fairly sunny and very tidal island, we perhaps have some unique opportunities to improve our self-sufficiency and lower our costs. This crisis is a stark reminder this longer-term goal shouldn’t be missed. And we also need to find ways to cut our energy usage altogether.

Advice from Citizens Advice West Berkshire

We got in touch with Citizens Advice West Berkshire to ask for their advice for people who are worried about energy price hikes and this is what they told us:

We hear from people every single day facing desperate choices because they’re struggling to pay their bills and we recognise why some people might feel they’re running out of options. We’d always encourage people as a first port of call to contact their energy supplier because they have to help you come to a solution. Try to negotiate a deal that works for both of you, whether that’s reducing your payments in line with what you can afford or finding a way to pay off any debts you’ve built up. If you’re worried about speaking to your energy supplier directly, then contact us or check out the advice on our national web-site at www.citizensadvice.org.uk

“CAWB can negotiate on your behalf and help you find grants and negotiate a realistic payment budget for you.

“If you cancel your direct debit, you might be charged a fee. Check your supplier’s website to find out what this might be. It’s also likely that if you move from direct debit to a different payment method you will end up paying more, as direct debit is often the cheapest option.

“If you leave a message on 01635 516605 (costs as for a landline and is included in most inclusive packages) we will return your call as soon as possible.”

It’s worth bearing in mind at times like this that CAWB is an independent charity not funded by central government or national Citizens Advice. Some of its funding comes from West Berkshire Council and Greenham Trust but a third of its budget needs to be covered by other fundraising so if you can support CAWB here it will benefit many people in the community.

Advice from the Hungerford Environmental Action Team

If you want practical advice about how you can save money and contribute to a carbon-zero future, you might want to drop in to the event organised by the Hungerford Environmental Action Team (HEAT) on 24 September: this all-day, free event at the Corn Exchange will be an Aladdin’s Cave of experts, advisors, companies and case studies keen to support visitors in drawing up their individual energy-cost saving and carbon-reduction roadmaps for their homes.

Brian Quinn

 

 

 

 

 

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