Cost of living : How can the UK government help reduce energy bills?

Great Britain electricity and gas prices took off this spring after the regulator Ofgem revised it energy price cap.

The cap, which sets the maximum amount a utility company can charge the average UK customer in a year, has risen by a dramatic 54 per cent from £1,277 to as much as £1,971.

This represents an increase of £693 per year for the average customer.

Worse, the regulator’s chief executive, Jonathan Brearley, has since told the House of Commons Business, Energy and Industrial Strategy Committee that he expects the limit to rise again in October, putting the cap “in the region of £2,800”.

Subsequent predictions were even more dire.

In response to rising wholesale gas prices worldwide, driven by increased demand and reduced imports into Europe, the review, due on 1 April 2022, could potentially leave up to 22 million households unable to meet their obligations.

Before his dramatic recent resignation and tilt at the Tory leadership, the former chancellor Rishi Sunak has announced that households in bands A to D will be given £150 in tax relief, with plans to offer £400 discount on bills, among other measures.

Dale Vince, boss of Ecotricity, called the measures “too little, too late”.

Responding in the House of Commons, Labour’s shadow chancellor Rachel Reeves also called Mr Sunak’s plans “a buy-now-pay-later scheme that increases tomorrow’s costs”.

Before the expulsion of Boris Johnson inspired by the succession crisis, the chancellor was poised to announce billions of pounds of further aid for people struggling from before expressed reluctanceonly to have his hand forced by the deepening crisis.

with Nadhim Zahavi now in Number 11 and also embroiled in a leadership campaign, settling the turmoil in the Tory party appears to be the first priority.

How much did electricity bills go up?

As of April 1, households now on the standard variable tariff saw their bills rise by 54 per cent to £1,971.

Around 4 million customers using pre-paid meters saw an increase of £708 from £1,309 to £2,017.

The announced new cap was calculated by Ofgem using a formula based on market prices and expected costs to suppliers.

As Mr Brearley and others have shown, it could rise sharply again in October.

What if I don’t have a standard variable tariff?

People shopping around and switching with standard variable tariffs could previously find deals hundreds of pounds cheaper than the maximum energy price.

Now all these deals have been cancelled, as the cost of energy supplies has risen.

At the end of the fixed term, customers will be transferred to the standard variable tariff at the maximum price level.

The option to shop is still available, but other offers will be more expensive, so customers are advised not to switch for now.

What alternative measures have been suggested?

Unexpected tax on energy companies

The Labor Party insisted that the government bring in a one-time tax on North Sea oil and gas producers who are among those who have benefited from a significant rise in prices this year.

Labor estimates the tax could raise £1.2bn for the Treasury, which could be used to help people struggling with the rising cost of living, although this figure represents just a fraction of the extra spending Britons expect this year.

Now the former chancellor was cool with the idea, but eventually changed his mind at the end of May, introducing a “temporary target levy on energy profits” of 25 per cent with a 90 per cent tax break for firms investing in oil. and gas production in Britain.

“The oil and gas sector is enjoying extraordinary profits not as a result of recent changes in risk-taking, innovation or efficiency, but as a result of a sharp rise in global commodity prices, partly caused by the Russian war,” he said.

VAT reduction

UK Energythe suppliers’ trade body, previously called for VAT on household bills to be reduced from 5 per cent to zero.

Businesses pay 20 percent VAT on their electricity bills, while the government offers a 5 percent rate for firms that use limited amounts of electricity. Businesses are not protected by energy price caps.

But in last October’s budget, Mr Sunak resisted calls to cut energy tax. Whitehall officials said at the time that the cuts would be poorly targeted, helping people who could afford to pay as well as those who would struggle.

Green fees

Suppliers have also asked for fees to be removed from their accounts, which fund investments in renewable energy sources and energy efficiency improvements. Instead, the investment will be paid for from general taxation.

They argued that it would be more progressive because people with higher incomes would contribute proportionately more. The levy is a tax on essential goods, which takes up a significant portion of the amount paid by low-income families.

E.On chief executive Michael Lewis, meanwhile, has called for a “polluter pays” approach, which involves raising the carbon tax to make up for money lost from billing charges.

Suppliers estimate that scrapping green fees and reducing VAT to zero could reduce bills by an average of £250-£300.

Distribution costs

Energy UK has also proposed an industry-wide funding scheme to allow suppliers to spread the cost of gas price spikes and supplier failures over several years.

Currently, the price cap mechanism means that all of these costs will be passed on to people next year.

Under the plan, lenders would provide funds to cover the immediate upfront costs of purchasing energy, with the money paid back over a longer period. The government will not guarantee the loans, but will monitor the scheme to ensure it is not abused.

Government funding

E.On also called for a “more radical” approach and suggested the government use public funds to reduce bills in the short term.

“As an example, this could mean that the government takes some or all of the cost increase on its balance sheet, allowing these sudden price spikes to be paid for later and reducing the immediate burden on consumers,” Mr Lewis said.

Dan Alchin, Deputy Director of Retail at Energy UK, noted that governments in other countries have provided direct support.

In Ireland, for example, households have been promised a €100 (£84) discount on their first electricity bill in 2022, while in Italy the government has provided loans to suppliers.

“Now nothing should be off the table. We need the UK Government to engage with industry and find a way through this that helps customers,” said Mr Alchin.

“They didn’t react as quickly as Treasuries in other countries.”

Why are electricity bills rising so much?

Gas was imported into Europe lower due to global economic recoverywhich caused increased demand in Asia.

Prolonged cold weather last winter and spring left less than normal amounts of gas in storage across Europe.

The UK imports about half of its gas and is more dependent on the raw material for heating homes than many European countries, which predominantly use electric heating systems.

Persistently low imports and the need to replenish gas storage for next winter have boosted gas demand and led to further increases in gas prices.

Russia is also accused of restricting gas supplies to Europe in order to exert political pressure on the EU.

Before his invasion of Ukraine On February 24, the Kremlin expected the EU to approve the opening of Nord Stream 2, its new gas pipeline that runs under the Baltic Sea and into Germany, although it was has since been blocked as a punishment for his aggression against a neighboring state.

Countries that previously depended on Russian energy imports have meanwhile been forced to look for alternative sources, such as Vladimir Putin turns out to be the chairman of a rogue state.

Meanwhile, wholesale electricity prices were also pushed up by higher gas prices and higher carbon prices.

Consumers will also have to cover the costs of failures by suppliers, some of whom failed to hedge against volatile gas prices by buying enough energy in advance.