As the price of energy is skyrocketing, so are customers’ bills. This appears to be fuelling a decrease in living standards and disposable income, exacerbating the cost of living crisis faced at the moment in the UK.
Why is There a Rise in Energy Prices?
The price of gas has risen recently because of a worldwide increase in demand for energy supplies. This increase in demand is in part because of the cold 2020/21 winter in Europe, which put pressure on gas supplies and reduced the amount of it stored. But also due to a lack of wind during the summer of 2021, which meant it was harder to generate more sustainable wind energy. Additionally, increased demand from Asian nations, most notably China, has put pressure on liquified natural gas supplies.
This is just the price of gas you may be wondering, but 85% of UK homes have gas central heating systems and gas generates a third of the UK’s electricity. This meant many energy suppliers collapsed when the wholesale price of gas spiked because they were unable to pass their increased costs onto customers. This is due to the energy price cap which is controlled by the industry’s regulator, Ofgem, not rising until April 2022. The energy price cap is a restriction on how much energy suppliers can charge customers per unit of gas and electricity. Meaning while costs for energy suppliers increased, the amount energy suppliers received remained the same, and so did not compensate for the rise.
How is this Fuelling Rising Poverty?
The significant energy price cap rise of 54% from the 1st of April 2022 is the main cause of fears of increasing poverty. This 54% hike, for 18 million UK households on standard tariffs with average energy usage, increases the annual energy bill from £1,277 to £1,971, a £693 rise. However, those on a prepayment energy meter, 4.5 million, with typical energy usage will see an increase in annual bills to £2017, a £708 increase, from April. It is also vital to highlight that this is only the rise to the energy price cap from April 2022, this is because the price cap is reviewed and set out every 6 months. This means that the future review in October 2022 is likely to again increase the price cap and further exacerbate this issue.
Many have made clear on social media, that this is an increase forcing them to choose between feeding their family or heating their home. Especially because post-tax income is now forecast to fall by 2% this year, after taking into account the rising cost of living. Which is the biggest fall since records began in 1990. And while, for some, wages may be rising, this will not compensate for prices rising at their fastest rate in 30 years. The Resolution Foundation think tank has described the situation as a “cost of living catastrophe”.
The contribution of the energy price cap rise to rising poverty is mainly due to its significant and sharp increase, but also since it is coinciding with the National Insurance increase and rising prices in shops. The National Insurance increase is being collected as the new Health and Social Care Levy. It is scheduled to rise from 6th April 2022 by 1.5%, so those earning between £9,568 and £50,270, who originally paid at a rate of 12%, will now pay 13.5%. And income above £50,270, originally charged a rate of 2%, will now be charged 3.5%. The government say that they expect £12 billion to be raised by this increase, which they say is to be spent on the NHS and also the social care system. But if applying historical principles of this government, a close watch of that money is a necessity.
Despite its seemingly positive name and intentions, this NI increase has attracted criticism for numerous reasons. One is that the 2019 Conservative Party election manifesto promised that there would be no increase to NI. However, the government have argued that the unpredictable events of the pandemic justify this rise. Another is that the NI rise will have a greater impact on lower-earners. This is because the 2% rate charged on income above £50,270 means if earnings are above this threshold, then NI will take a smaller proportion of earnings.
How are the Government Helping?
The government has responded by highlighting the number of schemes it has available to help the most impacted. They are the warm home discount, the winter fuel payment, the cold weather payment and the newly introduced household support fund. But the government is also offering support using the council tax system and loans.
The support available through the council tax system and loans is worth £350 and originates from 2 different sources. Firstly, in April 2022 people in council tax bands A-D, about 80% of homes, will receive a £150 one-off discount. And then in October 2022, when the energy price cap is predicted to rise again, customers in England, Scotland, and Wales will receive a £200 rebate on their energy bills. Due to being a rebate, the £200 will be repaid at £40 per year for 5 years starting in April 2023.
The new household support fund has received £421 million from the government. This means that this money has been made available to county councils and unitary authorities and can be awarded at the discretion of local councils. However, the government has said the money should be awarded “primarily to support households in the most need with food, energy and water bills”. Also, half of the money is ring-fenced for supporting households with children.
The warm home discount entitles recipients to a one-off £140 discount on their electricity bill between October 2021 and April 2022. This scheme is funded by energy suppliers and the costs of this are recouped through consumers’ bills, therefore the government sets a spending target to maximise the number of households who can access the scheme, and minimise the impact this has on consumers bills. This year, the spending target is £354 million and the government also expects that around 2.2 million households will use the scheme in this financial year.
Additionally, the winter fuel payment is worth £100-£300 depending on the age and living situation of the recipient and is paid automatically to those who receive state pension or certain other social security benefits. However, it is only available to those born before 26th September 1955, who lived in the UK for at least 1 day during the week 20th-26th September 2021.
And lastly, the cold weather payment scheme is offering a £25 payment for households on certain benefits or those that receive support for mortgage interest. This £25 payment can be claimed for each 7 day period of very cold weather between 1st November 2021 and 31st March 2022. This has been defined as the average recorded or forecast temperature for an area being 0°C or below for a period of seven consecutive days.
However, I would say considering the requirements needed to receive a payment from the cold weather payment scheme, the scheme is quite redundant. Due to these temperatures predominantly only occurring in certain parts of the UK, and therefore the vast majority of the population not experiencing temperatures to these extremes I don’t see how the government envisions this scheme being of great use to the vast majority of those in need. Additionally, according to the met office, there is currently only a range of 45-56 days per year when the temperature goes below 0.0°C,
The International Response
This section will allow you to contrast and compare the UK government’s response with those of international governments and allow you to develop a more nuanced evaluation of the UK government’s response.
The German government plans to reduce the green surcharge on electricity bills, which is used to support renewable power. It is also putting €130 million in subsidies to help lower-income households, eligible households of one person will receive €135, a two-person household will receive €175 with an additional €35 per extra person after that. However, due to Germany having some of the highest energy prices in Europe, even before the recent rise, many consumer advocates have called for more to be done. As seen by the Federal Association of Consumers (FZVB), which is calling for subsidies per household of at least €500.
The Spanish government has cut several taxes in an attempt to reduce consumers’ bills, these tax cuts were announced in September 2021 and are being maintained until May 2022. Interestingly in addition to that, the government has launched a tax on the increased profits that energy companies are set to enjoy, which aims to raise €2.6 billion.
In France, the state energy company EDF was forced to take an €8.4 billion hit, and limit the rise of bills on consumers to 4%. This was done to minimise the impact felt by households. EDF was also ordered to sell more nuclear power below the current market rate to rivals, the company owns 56 nuclear power plants which provide over 70% of France’s electricity. Additionally, 5.8 million lower-income households received an energy check (or chèque énergie) of €100 to help them with their bills.
Conclusion
I believe the UK government has gone nowhere near far enough to try to minimise the impact of rising energy prices, and it may even appear that they are actively trying to force money out of the pockets of those on low incomes and push them into poverty, due to their continuation of the national insurance increase.
I find this to be evidenced by the Resolution Foundation’s prediction that 1.3 million more people will be forced into absolute poverty by 2023, this statistic includes the 700,000 people who fell into poverty during the pandemic. This means as many as 16 million people in the UK (1 in every 4 or 5 people) could be officially classified as living in poverty by 2023.
I think the response of the Spanish government should serve as an example to the UK government. The delayed implementation of the national insurance hike and the implementation of a tax on increased profits gained by energy companies would be incredibly beneficial policies, learnt from the Spanish government’s response.
And last, but certainly not least, if you would like to read in more detail about the facts, figures, and effects of poverty in the UK, I would recommend this article: https://www.bigissue.com/news/social-justice/uk-poverty-the-facts-figures-and-effects/
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