Energy price rises will impact millions of households in the UK, but what is the broader picture? George Middlemiss, our graduate intern, reflects on the unequal impacts of the latest price cap rise by Ofgem.
On Thursday the 3rd of February, the new energy price cap was revealed by Ofgem. The price cap will rise by 54% on 1 April 2022, due to an increase in the wholesale cost of gas. At a time when other household costs are increasing, this news has caught the eye of the public – whose income is having to stretch further and further to keep up. In this blog post I will explore three broader issues that may not be apparent upon first glance.
Whilst the price cap increase will affect everyone, it will affect some more than others. It is estimated that there are currently 3.66 million households that are unable to afford to heat their home to an adequate level, according to the organisation End Fuel Poverty. The price cap increase will only serve to drive more households into fuel poverty.
The government has announced financial support to help households through this tough time. Whilst any support is welcome, they do not address the systemic issues that lead to fuel poverty. At its core, the factors that cause fuel poverty include low incomes, high energy prices and inefficient buildings.
Considering the impact of high energy prices on households, the price cap increase has reignited the discussion about the other costs that make up a household’s energy bill.
Social and Environmental levies
In particular, the discussion has centered on VAT and social and environmental levies. According to Ofgem, these costs make up 5% and 15% of a dual fuel bill respectively. The income from social and environmental levies goes towards funding the expansion of low carbon power, subsidising energy efficiency improvements, and addressing fuel poverty.
There have been calls for the these levies to be moved to general taxation (or at least let the treasury temporarily pay them) and suggestions to scrap the Energy Company Obligation (ECO) scheme all together.
Regen commented on the additional costs on energy bills in the Decarbonisation of Heat paper back in 2019. We argued that levies on electricity and gas bills should be rebalanced. At the time, such levies made up over 20% of an electricity bill, compared to less than 2% of a gas bill – effectively distorting the market in favor of gas. This is counterproductive in a system that needs to adopt more electrified heating systems.
There is also tension between funding environmental and social initiatives and the people that must pay for them. One could argue that a higher proportion of these costs should be paid by those who are wealthier, rather than the current system which operates essentially as a regressive tax.
With wholesale costs making up 35% of a dual fuel bill, one way for a household to reduce their spend on energy would be to use less of it.
Broadly speaking, energy efficiency seeks to accomplish this. Retrofitting a property to make it more efficient involves the installation of energy efficient appliances, insulation, draft proofing, and double glazing.
Beyond immediate cost reduction, energy efficiency is an effective way to contribute to addressing both the fuel poverty and net zero agendas. This is of particular importance in the UK, which is amongst the worst in Europe for thermal insulation. Not only would energy efficiency reduce costs and carbon emissions with the existing gas boiler infrastructure – but improved energy efficiency is also necessary for heat pumps to work effectively.
Regen commented on this in the Reinventing Retrofit paper from 2019, highlighting the pioneering Energiesprong approach which seeks to undertake a whole house retrofit and recoup the costs through energy bills.
There are also numerous community energy organsiations across the UK seeking to step up the retrofit agenda. People Powered Retrofit operate out of greater Manchester and offer advice and support that seeks to guide householders through the retrofit process.
The Energy price cap increase affects many people in the UK, but the impact it will have on poorer households is hard to overestimate. Increased energy prices provide an opportunity to reflect on some of the broader issues. Fuel poverty was an issue before the energy prices crisis struck and will likely continue to be so when things settle down. The additional costs on energy bills could be seen as unjust and ineffective in driving towards a zero carbon future. Energy efficiency continues to be an effective strategy for keeping costs low, reducing fuel poverty, and enabling the transition to a zero carbon energy system.