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UK faces ‘catastrophe’ after energy bills soar 80% amid warning price cap could hit £7,000

Experts warn bills could be pushed even higher without urgent intervention as gas prices continue to rise

Ben Chapman
Friday 26 August 2022 20:49 BST
The government has been warned that lives will be put at risk unless it takes urgent action
The government has been warned that lives will be put at risk unless it takes urgent action (PA Wire)

The scale of the squeeze Britons face on their incomes has been laid bare, with the energy price cap confirmed to increase average bills by more than 80 per cent in October – and forecasts predicting annual costs of £7,000 by April.

Regulator Ofgem has revealed that the price cap, which is supposed to protect consumers from unfair energy bill increases, will rise to £3,549 per year for an average household – more than three times last winter’s level. That is expected to leave some 8.9 million households in fuel poverty, charity bosses have said, with a “real risk” that children will go hungry as Britain’s poorest see almost half of their income taken up by gas and electricity.

The government has been warned that lives will be put at risk unless it takes urgent action to shield families from massive price hikes, with ministers having so far failed to answer calls for more financial help. However, Boris Johnson finally acknowledged on Friday that his successor as prime minister would “plainly” have to offer more cash, while the chancellor, Nadhim Zahawi, told people to cut down on their energy consumption to reduce their bills and insisted he was working “flat out” to develop support measures.

Alarmingly, worse is yet to come, after frenzied trading in wholesale energy markets on Friday saw gas prices jump by another 10 per cent, adding to big gains in the past two weeks.

At current market prices, the cap would exceed £5,500 a year by January and £7,000 by April, as analysts warned that the cost of gas could go higher still as Russia further squeezes vital supplies relied on by European countries. That would deepen the problems faced by millions of low-income families, who will already struggle to afford adequate heating and power through the colder months.

Even at the October cap level, poorer households will see their incomes “wiped out”, the Joseph Rowntree Foundation (JRF) said. The charity calculated that an average low-income family will have to pay four and a half times more for energy in 2023/24 compared with last year, while single parents will hand over almost two-thirds of their income after housing costs. Energy bills for low-income adults will exceed 120 per cent of their income.

“This is a truly impossible situation, leaving them having to cut down on energy use even to pay their bill, and having no money whatsoever left over for food or other essentials,” the JRF said.

Middle-income families will see almost a fifth of their earnings go on gas and electricity, prompting fears that businesses will collapse as people tighten their belts and spend less on non-essential items. The National Institute of Economic and Social Research (NIESR) said its calculations showed that around 2.2 million additional households will run out of savings by April 2024, bringing the total to around 6 million.

Peter Matejic, chief analyst at the JRF, said Ofgem’s “extraordinary announcement” had made the government’s cost of living support package obsolete.

“With the price cap very likely to increase significantly and forecast to remain high well throughout next year, our analysis shows it is sheer fantasy to think struggling families can pay these stratospheric energy bills without further government intervention on a significant scale,” he said.

Consumer champion Martin Lewis wrote in response to the cap announcement: “More help is desperately needed for poorest or people will die this winter due to unaffordability of an 80 per cent so far energy price cap hike.” He added that the situation is a “genuine social and financial catastrophe that is putting lives at risk”.

Sheila Correll, 80, from Lincolnshire, said she showers less, washes some clothes by hand, and has cut out luxuries in an attempt to save money on gas and electricity bills, but now thinks that pensioners cannot go on. Ms Correll, who receives £184 a week and currently pays £96 a month on her gas bill, said the coming increases will make her situation “impossible”.

“I was absolutely petrified,” Ms Correll told The Independent, describing her reaction when she saw the price cap announcement. “It’s devastating news, we can’t cope with increases like that on our low pensions. It’s a matter of heating or eating, but now it’s a matter of not being able to do either of those things.”

Sara Ogilvie, policy director at Child Poverty Action Group, said Friday’s announcement would “terrify” many families who will find it practically impossible to escape poverty.

“We know that families with children spend 30 per cent more on energy bills than households without kids – yet government has completely failed to recognise the extra costs facing households with children,” Ms Ogilvie said. “The next prime minister will be on a collision course with reality unless they increase support to reflect the scale of need, and uprate benefits in line with inflation.”

Energy experts said there is almost no limit to how high energy prices could now go, as countries across Europe face up to the reality of shortages, rationing and blackouts this winter. Tony Jordan, an energy expert at consultancy Auxilione, said many forecasts for the price cap are likely to prove too optimistic because they take an average of prices over the past days or weeks.

Currently, gas prices are rising so fast – sometimes by 10 per cent in a day – that such forecasts prove to be already out of date by the time they are published. “If you closed the price cap calculation for April today, it would be £7,200 a year. Could it go to £10,000? It’s certainly possible,” he said.

A host of problems are combining at once to push prices to new records almost daily, including planned outages at Norwegian gas fields, maintenance on the Nord Stream I pipeline from Russia into Europe, and delays to the Freeport liquefied natural gas terminal in the US, which isn’t expected to come online for another six weeks.

Mr Jordan added: “What would it take for the market to go back to normal? The only thing is a complete ending of sanctions on Russia, going back with the begging bowl, turning everything back on including probably the Nord Stream 2 pipeline.

“Then you would be swimming in gas rather than looking for the odd therm here and there that doesn’t exist. I can’t see that happening. There isn’t enough gas from America to replace the Russian piped gas. Yes, the market may come off a bit, but there is no reason for it to fall at the moment.”

Caroline Bain, chief commodities expert at Capital Economics, said the UK was “walking an absolute tightrope this winter”.

“If we get some cold spells, or a further tightening [of supply], Europe is going to have to look at rationing,” she said. “As an economist, it is difficult to forecast because this is completely uncharted territory. It’s unlike anything we have seen before. The oil shocks of the 1970s were nothing on the scale of what we are seeing with gas now.”

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