Ofgem confirmed that the main price cap will almost inevitably rise in April next year when the price caps will be reviewed next. The UK energy regulator has already raised Britain’s main energy price cap by 12% from the start of October from £1088 to £1277. For an additional 4 million households with prepayment meters, the price cap was increased by 13% from the start of October to £1309 from £1156. Analysts forecast the main price cap is likely to hit £1660 which is a rise of about 30%. This would be the highest level since records since the start of domestic energy bills being tracked in 2009.
The energy price cap was introduced to stop companies from being able to make profits by giving unnecessarily high bills to households because its demand is inelastic as it is essential for us. It is reviewed twice a year by Ofgem. The reason for the steep rise in the price cap is a spike in wholesale gas prices. They have risen 250% since the start of the year. This meant that the price which energy suppliers agreed to sell to households was a lower price than what they bought the gas for. Due to this, their costs were higher than their revenue, therefore, they were making losses. This caused nine companies to go out of business last month causing 1.7 million people to have to go to new suppliers. Ofgem’s chief, Jonathan Brearly, said that "legitimate costs have to be passed through" to the consumer. Otherwise more and more suppliers would have to go out of business. Even if energy prices were to fall by spring, the price cap is still likely to rise to allow suppliers to pay the costs that they’ve been absorbing over the last few months.
These rises in the price for energy for UK households will be felt by everyone as the cost of living continues to rise. This is thought to affect the poorest households the worst with some charities claiming that some households may have to ration their heating this winter as they don’t have enough money.
Although domestic consumers will have to pay more for their energy, the price cap is considered to protect households. This does not apply to businesses. Their costs attributed to energy have already risen quite steeply and they have had to absorb this. This is possibly going to be a critical issue for industries dependant on large amounts of energy such as the steel and chemical sectors. The rising energy costs have led some firms to stop production temporarily. If the high energy prices persist, they may have to pass on the costs to consumers which would make them less competitive against international producers and would then cause declines in industries which would cause job losses. Already two fertiliser factories were forced to close because of this issue. This had knock-on effects as it caused a shortage of CO2 gas. The business secretary, Kwasi Kwarteng, met with representatives of these industries in order to discuss these issues. There have been calls on the government to step in by giving more financial aid to these industries to subsidise the rising costs and prevent the shutdown of production. Countries such as Portugal and Italy have already spent billions. The government however have not hinted that they are looking to do this. It comes at a time when the government is trying to limit its borrowing after the costs of the pandemic has brought national debt to over 100% of GDP.
The UK are more vulnerable to the rise in gas prices compared to other major economies in Europe due to its limited storage capacity. The UK has a total capacity of 9.5 terawatt-hours. This is significantly behind France, Germany and Italy with the latter having almost twenty times the capacity. The UK is more reliant on a near just-in-time system where energy is produced domestically and imported when it is needed. However, this also means that the UK is at risk of the rising costs of wholesale gas prices internationally. Kwasi Kwarteng has said that the government is committed to shifting to "clean" power sources by 2035, including wind, solar and nuclear. This reduction of the reliance on fossil fuels was said to protect the UK economy from ‘the volatility of the gas price’.
Written by Florian Mihindukulasuriya Thiserage
Research compiled by Louis-Daniel Oloyede