Current inflation is being driven by rising energy costs, provoked by surging demand after the pandemic as well as Russia’s invasion of Ukraine, which in turn has put pressures on living costs. The Government has already taken steps to help the lowest-income households through these extraordinary times: reducing the Universal Credit taper rate; increasing the National Living Wage; freezing fuel duty for the twelfth consecutive year; and launching a £500 million Household Support Fund.
Over time, households will need to become accustomed to higher energy costs. However, since Ofgem’s confirmation of the price cap rise, which is now in effect, the Government has put forward a three-part support package worth £9.1 billion to help both lower and middle-income earners with the immediate adjustment. This includes: a £200 rebate on energy bills for all, to be paid back over the next five years at £40 per year from April 2023; a non-repayable £150 cash rebate for homes in Council Tax bands A-D, equivalent to 80 per cent of all households; and £144 million of discretionary funding for local authorities to support those not eligible for the council tax rebate.
While I appreciate your disappointment over Ofgem's decision, it was in reaction to the record rise in global gas prices. The energy price cap continues to insulate millions of customers from even higher bills, and by extending the energy price cap beyond 2023, the Government will be protecting 22 million households who are on default tariffs. Ofgem is also working to diversify our long-term sources of energy to protect customers from similar future price shocks.
To both safeguard and boost domestically produced energy, the Government is due to launch the UK's new public body to oversee our energy network. The new Future System Operator will boost security and resilience of UK energy supplies and support transition to net zero emissions. The Government also recently published its Energy Security Strategy, outlining how Britain will accelerate the deployment of wind, nuclear, solar and hydrogen power, while supporting the production of domestic oil and gas. The corresponding Energy Security Bill, announced in the Queen's Speech 2022, outlines concrete measures to achieve these goals, and will be central to steering Britain away from expensive fossil fuels that are subject to uncontrollable and volatile prices, and will provide both cleaner and more affordable energy.
Renewable energy is cheaper than gas and therefore is a better long-term solution. The UK renewable capacity is up 500 per cent since 2010, with offshore wind having increased tenfold. However, the Government recognises that more must be done, and so is also accelerating renewables with annual Contract for Difference auctions.
More broadly, I know that the Government is working to reduce bills and tackle fuel poverty, for example through the introduction of home energy efficiency measures. The Government’s Energy Company Obligation and the expanded Warm Home Discount schemes will also provide at least £4.7 billion of extra support to low-income and vulnerable households between 2022 and 2026.
I have spoken with colleagues at the Treasury who have assured me that all taxes are kept under review, and any changes to taxation are carefully considered and would announced by the Chancellor. It is worth noting that additional taxes are already placed on the extraction of oil and gas, with companies engaged in the production of oil and gas on the UK Continental Shelf subject to headline tax rates on their profits, that are currently more than double those paid by other businesses. To date, the sector has paid more than £375 billion in production taxes.
Energy Bill Rebate:
BEIS is consulting on the details of the rebate and how best to deliver it to ensure that domestic customers on different payment methods and supplier contracts benefit. It is seeking views to shape the processes needed to provide the funding to energy suppliers; how the reduction will be passed on to consumers’ bills and any recovery mechanisms needed. This consultation is now open to all but, in particular, the Department would like views from energy and consumer groups, to take part, please visit: https://www.gov.uk/government/consultations/technical-proposals-for-the….
As far as I am aware, there is not an opt-out option, the energy bill reduction is not a loan – there is no interest due on it, no debt attached to it, and it will not affect your credit rating. It will simply help people with the increase in energy bills by spreading the increased costs over a few years, so they are more manageable for households.
The cost of prepayment meters is higher than those who pay for their gas and electricity by direct debit. As I understand it, prepayment customers have infrastructure that other customers don't use and the costs of supplying prepayment meters compared to standard meters are higher due to the different meter requirements and different payment systems. As such the cost of serving those customers is higher and therefore prepayment customers pay more. You will be reassured to know that the Energy Price Cap ensures those on prepayment meters pay a fair price for their energy and of course the Chancellor's support package extends to prepayment customers.
European Energy Prices:
While I understand your frustrations, I am sure you can appreciate that comparing energy price caps from different countries is not necessarily useful as the landscape of each countries' energy market is different. For example, I am aware that the energy price cap in France has increased by 4 per cent. However, the money to fund the high global gas prices must come from somewhere and it will be French taxpayers and investors that make up the difference.
Further, France supplies around 70 per cent of its energy from nuclear plants. While renewables are likely to provide the majority of the UK's carbon-free power by 2050, reliable low-carbon power sources, such as nuclear, are also needed to achieve a low-cost reliable system for consumers and therefore nuclear will continue to have an important role to play in the UK’s energy future mix, as confirmed in the Energy Security Strategy.
The UK gas market is one of the most liquid and developed in the world and provides security through diversity of supply. Most of the gas supply to the UK comes from domestic production and imports from reliable suppliers like Norway. There are no gas pipelines directly linking the UK with Russia. Although we receive some Liquefied Natural Gas from Russia, we are in no way dependent – less than four per cent was sourced from Russia in 2020. While this is a small proportion of our supply, I know that the Government is exploring options to end this altogether.
Further, the UK will phase out the import of Russian oil and oil products by the end of this year which makes up roughly eight per cent of UK demand. I welcome that this will give the market, businesses and supply chains more than enough time to replace Russian import. The Government will support businesses through a new Taskforce on Oil to support them to make use of this period in finding alternative supplies. While the scale of the economic effects is highly uncertain, the largest effect on households from the conflict will come through higher energy costs. Most households will therefore be protected from immediate impacts through the Ofgem energy price cap until the autumn.
Rising Electricity Bills:
The rising global prices for fossil fuels, especially gas, are increasing at an unprecedented rate. The UK is vulnerable to global price volatility as it is a net importer of natural gas and ultimately, this feeds into all customer energy bills in the UK. Electricity prices are heavily impacted by rising gas prices because gas is one of the fuels used to generate electricity. This is why I welcome the Government’s Energy Security Strategy, which could see 95 per cent of all UK electricity generation be low carbon by 2030, which will reduce reliance on gas, but also help meet the statutory decarbonisation target of net zero by 2050.
Oil and Gas Companies (profits):
As you may know, energy supplies have been severely impacted by global turmoil. This has caused extreme price volatility, with prices changing several times a day in some cases. Please be assured that companies which engage in the extraction of oil and gas on the UK Continental Shelf are required to pay headline tax rates on their profits. This rate is currently more than double that paid by other businesses, and I know that the sector has currently paid more than £375 billion in production taxes.
While I completely understand how frustrating this can be, energy is supplied through an open market in the UK. I know that the Government keeps consumer markets under review, but I am unaware of any plans for new regulation. Nevertheless, I will be sure to keep a close eye on future developments. Further, the Government is clear that we need to support domestic production as we transition which will ensure billions in investment, the protection of 40,000 jobs and energy security.
You may welcome, however, that customers who are not on the gas grid will be protected by the energy price cap if they are on a default tariff with their electricity supplier.
The standing charge is a daily flat rate that suppliers charge their customers to cover the cost of providing a live supply regardless of how much energy they use. I understand that it includes charges from network companies for using pipes and power lines to carry gas and electricity supplies, and the maintenance and installation of meters, billing and accounting. A small proportion of the standing charge also goes towards Government initiatives that help vulnerable households and reduce carbon emissions.
Ofgem requires energy suppliers to separate out the standing charge from a tariff’s energy unit rate so consumers can see what the different charges amount to. While the setting of tariffs is a commercial matter for individual supply companies, the energy unit rate and the standing charge together for a supplier’s default and standard variable tariffs must not exceed the level of the price cap.
Network costs cover expenses related to the gas pipes and electricity cables that carry energy across the country. Network companies charge energy suppliers an Ofgem-regulated price for their use of the energy network. I understand that one driver of rising network costs is the recovery of Supplier of Last Resort (SoLR) levy costs. In a competitive market, it is normal for suppliers to exit the market from time to time. Unfortunately, pressure from the sudden uplift in global gas prices has increased the number of suppliers exiting the market, and suppliers acting as a SoLR can make a claim for any reasonable, additional, otherwise unrecoverable, costs they incur. These levy claims are paid to energy companies by the distribution network companies and recovered from consumers via their charges.
While I understand frustration at this, I am encouraged that Ofgem has reviewed their approach to supplier licensing with their resultant package of measures aimed at driving up standards across the energy retail sector by promoting more responsible risk management, improving governance, increasing accountability, and enhancing Ofgem’s market oversight. In addition, the energy price cap, which sets a maximum price for customers on standard default tariffs, will remain in place, protecting millions of people.
Price Cap Consultation:
I am aware that Ofgem is proposing to reduce the period that the price cap is reviewed and set from every six months to every three. Alongside this proposal, Ofgem is carrying out a consultation which will run until 14 June to seek the views of stakeholders and customers. For more information, please visit: Ofgem backs consumers with price cap update | Ofgem
Although those protected by the Energy Price Cap are paying a fair price, these customers could find further reductions by shopping around. Comparison sites provide useful information on best deals, and changing providers can be done easily, either online or over the phone.