How Is the Rising Cost of Energy Affecting Your Home and Business?

Date 13 Oct 2022

The government's decision to freeze energy prices has given millions of UK homeowners hope by avoiding the possibility that their bills might soar by another 60% in October. When the price cap was raised in April 2022, domestic energy costs had already surpassed a new high of £1,971 annually.

In October, as the price cap was raised once more, consumers who were already experiencing a cost-of-living crisis due to sky-high weekly grocery expenditures now had to deal with an increase in their energy bills. This would have resulted in annual expenses reaching a new high of £3,549.

The new price cap in October will see the average bill rise to £2,500 a year as a result of the two-year energy bill freeze announced by the new prime minister, Liz Truss; this will save households £1,000 a year compared to the initially anticipated increase. It will remain frozen at this level until 2024.

According to research, up to 75% of British citizens would be fuel poor by the first of January 2023. People would have been forced to choose between eating and keeping their houses warm if the original rise in October had taken place. Charitable organisations fighting poverty had warned that vulnerable populations, including senior individuals, would have faced major health risks.

The new PM's proposal to cap annual bills at £2,500 is in line with other government assistance programmes that have already been publicised. Along with the £650 government payment for those on low incomes, such as welfare claimants, this also includes the £400 that will be paid to everyone in Britain this fall to help with their energy bills.

Why are utility bills so expensive?

The surge in fuel prices, which has been dubbed a national emergency and is widely seen as posing a threat to the populace on par with the coronavirus pandemic, has been caused by rising wholesale gas costs.

Before the PM announced the energy bill freeze, there were concerns that without action, the cap may increase to £4,650 and then £5,456 the following year. Consequently, the expense of fuel alone would account for more than 20% of the typical UK household's income. That would completely deplete some people with assistance, making life difficult.

As of 2021, global wholesale prices for gas and electricity were rising. This was attributed to increased demand as a result of the economy's recovery from the COVID-19 lockdowns. In October 2021, the average UK household spent £1,400 a year on energy.

The situation was made worse by Russia's invasion of Ukraine in February, which led to significant reductions in gas supply throughout Europe. The cost of natural gas has skyrocketed to an all-time high. This also resulted in the skyrocketing price of electricity.

Although the UK imports just 3% of its gas from Russia directly, the continent of Europe, which is a net importer of gas and connected to Russia by pipeline, is also experiencing a gas crisis. Gas is in high demand in Britain since so many residents use it for heating. In addition, burning natural gas produces about one-third of the power used in the UK.

The enormous rise in wholesale costs caused the demise of 31 British energy companies in 2021 and 2022. Their clients have switched to other market vendors.

Energy businesses that are still in business are attempting to recoup the cost of the additional energy they use by raising consumer fees. To better represent the current volatility of the market, the price cap will now operate for three-month intervals instead of the previous six-month periods starting on October 1.

Why is the freeze on energy prices so important?

If the three-monthly price cap increases were allowed to continue, energy costs might have continued to grow sharply. It would have caused economic instability for enterprises as well as impoverishment for home energy users.

The restriction was implemented in 2019 to protect consumers from hefty bills. However, it was ruled unfit for purpose after failing to stop the energy crisis that we are all currently experiencing. It has failed to stop significant price increases that customers cannot afford.

Currently, it's unclear exactly how the energy bill freeze will be paid for. It has been reported that more than £100 billion in government borrowing will be used to pay for the aid programme the prime minister has proposed. Some speculation suggests that the debt owed by Britain to COVID may also be temporarily put on hold.

This strategy helped Britain pay off its war debt in the 1940s, and it may entail refinancing the £311 billion debt the government acquired during the pandemic so that it may be returned over a longer period.

British citizens are increasingly taking out loans to cover essential expenses like heating bills, according to research done in 2022. According to debt counselling organisations, the practice of "buy now, pay later" has extended to loans for utility bills, when debtors take out a loan now and repay it over a longer period.