Why are British household energy bills so high?

The typical household energy bill in Britain is expected to rise to £4,420 in April, more than three times its level at early 2022, fueling calls for more state aid for families facing energy poverty.

But why has the UK energy price cap, which dictates a cap that suppliers can charge the vast majority of households in the country, has risen so high and how does it compare to what families pay in other countries in Europe?

The options facing the incoming prime minister – who will be elected by members of the ruling Conservative party in early September – are already becoming a problem in the leadership campaign.

Why are the bills so high?

Energy bills started to rise sharply as gas prices rose over the past 12 months, mainly driven by Russia’s pressure on supplies to Europe.

Wholesale gas prices have now reached about 10 times their average for the past decade, after Russian supply restrictions tightened following the invasion of Ukraine, which saw Moscow and the West waging an economic war.

Although Britain imported only a small percentage of its gas from Russia before the war, it is connected by pipeline to the wider European market, which relied on Russia for as much as 40 percent of its supplies. This means that the prices paid by British suppliers still follow relatively closely those in the rest of Europe.

However, UK bill payers are more exposed than their continental counterparts, as the vast majority of homes are heated by gas and about 40 percent of electricity is generated by gas-fired power plants – a higher proportion than most European countries.

The collapse of dozens of small retail energy suppliers as gas prices rose has also added about £100 to bills. Analysts have pointed out that regulator Ofgem’s adjustment to its methodology for calculating the energy price cap has further pushed the bills by allowing suppliers to recover more of the cost of hedging the price of the gas they prepay. and at a faster purchase rate.

How do accounts compare to the rest of Europe?

The situation varies quite widely and strongly depends on the degree of state intervention. Some governments in the rest of the continent have gone further than the UK government in taking measures to shield consumers.

Direct comparisons are difficult, but the typical Italian household is prediction to currently spend around £2,300 a year, compared to a current UK price cap of £1,971. A July estimate for households in Germany put the average bill at £2,759.

France is something of an outlier with President Emmanuel Macron on track to almost completely protect consumers from rising prices. After marginally increasing gas and electricity bills last year, they have since largely capped, more than a 4 percent increase in household electricity costs. The French state, which owns 84 percent of energy supplier EDF, will completely nationalize the utility as it bears the costs.

The UK has so far announced a £15bn package that will save £400 on most household bills, with more going to poorer and more vulnerable families. But this was based on the expectation that the price cap would reach £2,800 in October, well below the latest autumn forecast of £3,582.

Why have a price cap that doesn’t restrict prices?

Despite the name, the price cap wasn’t meant to keep bills from rising when it was introduced in 2019; it was intended to prevent suppliers from earning excessive profit margins on consumers who were less willing or less able to shop around when old fixed-price deals expired.

But as wholesale costs have risen, suppliers have largely withdrawn fixed-term agreements. About 86 percent of Britain’s 27.8 million households have now defaulted on rates below the price cap.

Ofgem, the regulator, announced last week that it would review the limit once every three months instead of six months. While that would mean bills would fall faster if wholesale prices fell, it also means customers will be more likely to be hit by higher energy costs in the near future unless Russia opens gas taps soon.

Cornwall Insight, the consulting firm that released the latest forecast of £4,420 for next spring, has proposed abolishing the cap altogether, adding: “If it doesn’t control consumer prices and hurt suppliers’ business models, we need to ask ourselves whether it is fit for purpose.”

What are the options to reduce the bills?

There is increasing pressure on ministers from various interest groups to provide additional aid. Poverty activists worry that the poorest households will be faced with a choice between ‘eating and heating’ this winter, when energy consumption peaks. And economists worry that middle-income households will drastically reduce their discretionary spending, pushing the UK into a deeper recession than predicted.

Liz Truss, who is a favorite to become the next prime minister, has insisted she would rather cut taxes than give more ‘handouts’, even as her allies warned that additional support is not out of the question. She has previously said she would suspend “green” taxes on energy bills – intended to help fund investments in low-carbon generation and improvement of the housing stock.

Rishi Sunak, the other leader candidate and former chancellor, has previously said he would cut VAT on utility bills. This week he pledged to expand the £15bn aid package for power costs he announced in May, but has not given any details so far.

The candidates’ expensive promises – to suspend “green” charges or cut VAT on bills – would save less than £200 per household.

Liberal Democrat leader and former energy minister Sir Ed Davey has proposed freezing the price cap at its current level, with the government taking the £36bn he estimates that would cost.

Davey has proposed extending a windfall tax on energy companies and using higher VAT receipts to help pay them. But his estimate of a £36bn cost to taxpayers could eventually fall too low, with future gas prices stubbornly remaining high into 2023.

In the longer term, Kwasi Kwarteng, the company secretary, has proposed breaking the link between gas and electricity prices as more renewable energy sources such as wind and solar are added to the grid, a move that Ofgem has supported.