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LONDON – An expected rise in UK energy prices this winter is being described as a national emergency, posing at least as much of a financial threat as the coronavirus pandemic.
A regulator-set limit on consumer energy bills is predicted to be a shock to the upcoming increase the majority Fuel pushes families into poverty and puts pressure on budgets that can hit industries like hospitality, travel and retail.
On Wednesday, consultancy Auxilion published a revised forecast for the cap, which is charged by almost all energy suppliers, forecasting an increase to its current rate of £1,971 ($2,348) a year for the three months to October 1.
In subsequent quarters, it said the cap could reach £4,650 and £5,456 without intervention, taking it to more than a fifth of the UK median income.
The average household paid £1,400 for its energy in October 2021.
Why is the price of electricity rising so much?
Global wholesale gas and electricity prices are already rising in 2021 due to higher demand as the economy reopens from the Covid-19 lockdown. As supply competition between regions has intensified.
Russia’s invasion of Ukraine in February caused a sharp drop in gas supplies to Europe, sending European natural gas prices to record highs and raising electricity prices.
Although the UK gets only 3% of its gas from Russia, versus around 35-40% across the European continent, it is connected to the rest of Europe by pipeline and is a net importer.
The UK has a particularly high demand for gas, as it has a larger proportion of homes heated with gas than most European countries, and About a third of its electricity is generated from burning natural gas.
“The impact was exacerbated by higher electricity prices in Europe, where drought conditions affected hydropower plants and unplanned outages reduced French nuclear production,” Moody’s senior vice president Joanna Fick told CNBC.
The price cap debate
Since the start of 2021, 31 British energy companies have collapsed due to rising wholesale prices, with their customers shifting to other market players.
The remaining suppliers are reimbursing the cost of additional energy required to be purchased through household bills, adding £69 to the cap of £1,971 in April’s latest price which runs over six months. From October 1, the cap will run for three months to reflect greater volatility.
As well as unsustainable businesses that have not adequately hedged their energy purchases, the price cap – which makes Britain a bit of an outlier in how it deals with energy prices – has been deemed unfit for purpose for failing to stem the current eye-watering price rises. For consumers
According to regulator Ofgem, the cap was introduced in 2019 to prevent consumers who do not regularly switch suppliers from facing excessively high fees rather than preventing overall price increases that are dictated by the wholesale market.
Nicolas Buthors, an equity research analyst at Paris-based AlphaValue, told CNBC that a few insolvencies are likely at smaller companies this winter, but it’s likely that all or most of it will weather the storm.
After the recent turmoil “the weak suppliers are out and the strong remain”, he said.
However, there is no doubt that millions will struggle to meet their bills at current predicted price cap levels (official figures to be announced by Ofgem on 26 August).
The Government has so far announced a one-off grant of £400 to help all families with bills, with an extra £650 in means-tested benefits for families and £300 for pensioners.
Yet it now looks “very modest” in light of the updated forecast, Moody’s Fic said, and many households are still struggling to make payments, and utilities – many of which operate on low margins – will face increasing bad debt risks.
Liz Truss and Rishi Sunak, the candidates to become the next British prime minister, continue to throw mud at each other, despite the public, commentators and politicians calling for much bigger action to avoid an unprecedented crisis this winter. Plan to deal with it.
Both said they would have to wait until the new price cap is confirmed by Ofgame and confirm the measures after the leadership election is over next month.
“The scale of the problem — which is similar to Covid in terms of the financial impact on the entire population — requires government intervention,” Nathan Piper, head of oil and gas research at Investec, told CNBC.
Although its preferred Centrica, the owner of British Gas, has come under fire for not doing more for customers after reporting healthy results profit In the first half of the year, Piper said the sector as a whole was not likely to suffer the kind of losses to offset wholesale price increases, which may have been elevated for years.
“For those who suffer the most, suppliers will be flexible in paying, but there is a limit to how much damage they can do because you want a healthy electricity sector when this crisis is over and you want suppliers left.
“A short-term hit to supplier profitability may help for a while, but they have to be healthy enough to survive the period, when you obviously had a lot of suppliers that weren’t strong enough before.”
Ultimately, Piper said the government would need a plan to either fix electricity prices at their current level and cover the difference for suppliers, or raise the energy price cap and offer rebates to households.
So far, Sunak has said he would cut sales tax on energy bills and find £5 billion in support for low-income households, possibly through the recently announced extension. Windfall tax on energy companies
Truss said he could exclude “higher earners” from the £400 payment, and focused his message on proposals for wider public tax cuts and the suspension of the green levy on energy bills.
Meanwhile, the opposition Labor Party said it would freeze the current price cap by extending the windfall tax and finding other savings.
The scale of the current emergency has led to debate over the feasibility of restructuring the energy industry, or the temporary nationalization of energy companies unable to reduce prices. Advocated by former Prime Minister Gordon Brown.
Some, including Utilita Energy Chief Executive Bill Bullen, have argued that any additional aid package should be targeted at low-income households; Others say the scale of the problem requires the widest possible safety net.
Centrica and Octopus, a renewable energy group, have discussed with government ministers a plan to secure a funding package from commercial banks that would allow them to freeze current price caps and pay back the money over the long term through surcharges on bills. .
Rebecca Dib-Simkin, Octopus’ chief marketing and product officer, told CNBC the company had already absorbed £150 million in cost overruns for its customers and was handling 40,000 calls a day. He said the company was well supported by pensions, energy and investment giants, particularly as the crisis continued over the winter as the sector needed more government support.
Octopus Report The UK energy retail business made an operating loss of £1 million in the 2020-2021 full-year.
AlphaValue’s Bouthors said the plan proposed by Centrica and Octopus would be desirable for suppliers as a way to get remunerated for current costs and avoid additional damaging taxes.
“But it also requires leadership and guidance from politicians, and for now we are waiting for the next prime minister,” he said.
While Bouthors said the current UK situation was “definitely” insufficient, he said he believed a plan similar to that in other countries would eventually emerge.
“Every European country has found a solution, either through free cash or a windfall tax, so I think a balance will be found in the UK,” Buthors said. “But for now it’s a mess and too complicated.”