ITV News Business and Economics Editor Joel Hills reports on the energy price hike
The surge in the market price of gas is unprecedented. In the space of twelve months it has more than quadrupled.
Most households have felt their bills rise as a result but they have also been protected from the full force of the spike by the government’s price cap which was last set in August.
The bad news is that since then, gas prices have continued to head north with some velocity and, as a result, the cap is expected to rise by as much as 40% when Ofgem sets it again next February.
The current cap for the average household is £1,277 a year. The Tony Blair Institute for Global Change, estimates it could rise to almost £1,800.
"For customers who are on standard tariffs - which change and are generally closely aligned to the price cap - they will see a rise of between £450 and £650, if you believe what most analysts think is going to happen," says Tim Lord, senior fellow at the Tony Blair Institute.
"For people who are switching from what were cheap fixed-price deals, which expire and go onto the price cap, they might be seeing a rise of between £700 and £900."
Mr Lord points out that these calculations are based on average energy use. Large families and people who live in poorly insulated homes are likely to pay more.
These are eye-popping increases. They are forecasts but they are credible.
Many households could see their energy bills double, says Tim Lord
The way Ofgem calculates the April cap is complicated. It is based on a trailing average drag of forward prices in wholesale energy markets between August 2021 and February 2022.
Given that we are two thirds of the way through that period, we can be reasonably certain that the rise, when it comes, will be significant.
There are approximately 27 million households in the UK. They are broadly split between those on standard variable deals and those on fixed-price deals.
The scale of the sudden change in energy bills will affect almost everyone. Some households are likely to see their bills double.
Tim Lord warns that the price rises will prove calamitous for some people, unless the government comes up with a plan to manage them.
"Unless government can find a way of acting to address some of the impacts, in particular on people on the lowest incomes, I think it could cause genuine hardship. Already, people struggle to make ends meet, week to week and month to month."
Tim Lord says the government could do several things to cushion the blow.
Temporarily removing VAT from energy bills would save the average household £85 (at a cost of £2.4 billion to the Treasury).
Shift environmental and social obligation costs
The government could also shift environmental and social obligation costs - which are currently added to electricity bills - onto general taxation. The vast majority of these costs are subsidies for renewable energy generation (eg. wind and solar power). Doing so would save the average household £175.
Remove the cost of bailouts from bills
Suppliers that take on the customers of failed supplier incur losses. These losses could recovered over a longer period, potentially saving households more than £50 a year.
The price cap has insulated households from the worst of the price increases because it prevents energy companies from passing on their spiralling costs.
Unfortunately, it means that companies are often supplying their customers with gas and electricity at a loss.
Twenty five energy suppliers have gone bust so far this year. With the exception of Bulb, which is being propped-up by a colossal loan from the government, customers of failed suppliers have been moved to those who still trade.
Eon boss Michael Lewis told Joel Hills the energy bill rise will 'certainly cause hardship' to customers
Eon has inherited 280,000 customers from the collapse of several companies, including Igloo, Symbio and Hub.
Under the terms of Ofgem's Supplier of Last Resort process, Eon is obliged to honour the price cap and so the company is supplying them with gas and electricity at below the market rate.
"Overall, that will cost us between £150 million and £200 million,” says Eon’s boss, Michael Lewis. "But, of course, that [cost] will go into future energy bills".
Mr Lewis argues that the spike in energy prices has exposed a flaw in the market.
"There were too many [energy] companies that came into the market, that were poorly capitalised - that is to say they weren’t investing their own money - and they weren’t engaged in proper risk management and hedging.
"When there was this price shock they weren’t able to withstand the price increase," he insists.
"They have effectively been gambling with customers money.
"All customers will have to pay for their failure."
Mr Lewis says the Tony Blair Institute’s calculations are "plausible" and wants the government to intervene to shield consumers by cutting VAT on energy bills, moving environmental levies into taxation and picking up the bill for bailing out failed suppliers.
"Many people are in for a shock," he says. "Most households are not aware of what is coming".
The rise in energy bills is driven by market forces. Demand for fossil fuels exploded as countries around the world unlocked.
Without the energy cap, price rises would have been passed on to consumers in full but the nasty surprise has been delayed, it hasn’t gone away.
In the long term, the energy market looks in need of reform. In the short term, more energy suppliers look destined to fail and consumers face the prospect of a painful, inflationary kick in the spring.
Gas and electricity costs more and that cost has to be paid by someone. Households, either as consumers or as taxpayers, will end-up footing the bill.
A government spokesperson said: “Protecting households’ bills across the UK has always been our absolute priority, which is why we have ensured the Energy Price Cap will remain in place this winter despite the rise in global gas prices.
“While we recognise the cap may rise in April, we continue to support those most in need through our £500m Household Support Fund, on top of other schemes like the Warm Home Discount and Winter Fuel Payments.”