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Soaring energy prices place UK Government under pressure


Rocketing energy prices have placed the UK Government under pressure to take action to combat the impending cost of living crisis.


Gas and electricity bills for households peaked in October after the price cap (a market price ceiling set by the regulator Ofgem) was raised. The price cap is expected to further rise in April 2022 - this has led to predictions that the average UK energy bill will rise by around 50% to roughly £2,000.


The energy market resembles an oligopolistic market, with firms having a degree of price-setting power. Thus, price caps are implemented to prevent the exploitation of consumers by firms that may charge unnecessarily high prices. The energy price cap was first introduced in 2019 to protect the bills of roughly 15m households who did not opt for fixed-price deals.


The cap is lifted to accommodate for high market prices of natural gas to prevent the collapse of more retail energy suppliers. The higher prices for natural gas are due to a number of factors including a colder winter in Europe which depleted gas supplies, a lack of wind to restock wind supplies and a higher demand for gas in Asia due to a colder winter in the continent.


The market price for natural gas has risen from £2.50 to £4.50 before dropping suddenly to £1.70, according to a report by the Guardian. The price has recently started rising again to £2.23 - a significant increase from January 2021 when the price was 50p per therm.


The imminent rise in energy bills will most likely have a detrimental impact on those on the lowest incomes in society, particularly those dependent on interest payments on savings and those on fixed incomes. As bills rise, these households will face a squeeze on their disposable incomes, leading to a decline in their quality of life. It is likely that many will face ‘fuel poverty’.


According to the BBC, a recent survey suggested that around half of Britons would not be able to afford a rise in their monthly bills of £50 per month - this is the increase that will occur in April.


The hike in energy bills in April will coincide with the rise in National Insurance contributions in April, further adding to the squeeze on households. The higher prices of fuel will likely contribute to rampant inflation, which some predict could reach as high as 7% later this year.


To alleviate this crisis, the Government has a number of options. The Treasury could potentially cut energy bills by roughly 5% if they abandon the VAT rate on gas and electricity.


There is also the option to place a windfall tax on North sea gas producers who are set to make significant profits from the gas crisis. The tax revenue received from this could be used to subsidise energy bill payments for households.


A further solution being explored is a ‘’cost deferral mechanism’’. Large financial corporations would lend to energy companies who would spread the hike over a longer period of time e.g a £120 premium each year for 5 years.


Whichever solution is chosen, it will likely be received well by consumers who fear further rises in costs of living.

 

Written by Deandra Peiris

Research compiled by Steven Li


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