In the News

Energy Price Cap Jumps Again - An Economic and Social Crisis Arrives

Geoff Riley

26th August 2022

When is a price cap not really a price cap? When it keeps changing and when the cap is certainly not a cap on bills.

There is no room for doubt. This is an economic and social crisis that demands strong and immediate government intervention. In this blog we are collating key sources of comment and analysis on the latest announcement on energy prices.

Households face a huge leap in gas and electricity bills from October after the price cap raised by 80% from £1971 to £3,549 a year.

For low income families this is the equivalent of a massive increase in taxation - energy is an essential service, there are clear limits on the extent to which demand can be lowered when prices climb higher. Here is a article from Rupert Jones in the Guardian - New Ofgem cap means poorest homes to spend up to 47% of budget on energy

So do tens of thousands of small and medium-sized businesses who will be unable to meet their energy costs over the autumn and winter.

The latest (and not the final) jump in the energy price cap is a huge negative demand and supply-side shock for the economy. And whilst this blog tends to focus on the economic and financial considerations, we must never lose sight of the enormous human (social) cost that the soaring price of energy is creating.

The energy market is failing and there is deep-rooted regulatory and government failure too.

As Martin Lewis points out, the new cap of £3,549 is an average and is not a cap on the actual bill that a household, business, charity or any other organisation will pay.

Businesses of course are not part of this cap and there is growing evidence that thousands of businesses across the country risk closure this winter unless there is strong government intervention.

Robert Cuffe below has the chart from the energy regulator OFGEM which shows the breakdown of how the cap is calculated.

Faisal Islam frames the impact of the energy price cap brilliantly here.

More from the Financial Times

The FT reports here that energy suppliers warn the majority of UK customers will be plunged into fuel poverty by Christmas. Citizen’s Advice estimates 18 million people — one in three UK households — simply won’t be able to pay.

The Guardian here explains what the energy price cap means

The new £3,549-a-year cap is based on a household with “typical consumption” on a dual electricity and gas bill paying by direct debit. It equates to a direct debit of almost £300 a month.

Energy Industry Analysts Cornwall Insight predict that the UK energy price cap will hit £5,386 in January and £6,616 in April warning of “incredible hardship” this winter. This is completely unsustainable.

The National Institute for Economic and Social Research forecast that the latest hike in the energy price cap will lift the annual rate of UK inflation to 14% adding 2.7 percentage points to the CPI inflation rate in October alone.

Ed Matthew raises an important point about the long term consequences of the UK having the least energy efficient housing stock in Western Europe.

Max Mosley from the NIESR raises an incredibly important point. The percentage of households with no savings is forecast to climb to 22% as savings are wiped out by surging energy bills. In other words, in 2023, nearly one quarter of families in the UK will no have savings at all.

I'll be adding more links and comment shortly.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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