The first week of summer sunshine is a tough time to get Britain focused on next winter’s energy crisis. But ScottishPower’s chief executive Keith Anderson is right to be shouting about it.
His concern is that the government is taking a “wait and see” attitude to what is obviously a looming emergency. Warmer temperatures now may cushion some households from the full force of the 54 per cent rise in the capped energy tariff to £1,971, which took effect in April. But halfway through the period in which the next price cap is set, another jump looks inevitable: it could increase to between £2,600 and £2,900 from October, according to various estimates, or by as much as another 47 per cent.
Those prices are for the default tariffs paid by direct debit. Some of the most stretched households, including those on prepayment meters, pay more. And whereas the tariff cap once applied to 15mn households, it now will affect 22mn and rising, or approaching 80 per cent of the country.
The government’s existing package of support is clearly inadequate, amid forecasts that 40 per cent of households could find themselves in fuel poverty, spending a high proportion of their income on heating and energy.
What’s on offer is up to £350 off bills. Only £150 is even vaguely targeted at those most in need, through the blunt mechanism of council tax bands set on 1991 property values. The other £200 discount won’t kick in until October, is spread across the entire market and is repaid at £40 a year over five years. That’s against bills that could have risen by up to £1,600 come October compared with a year earlier.
Anderson’s proposal has its merits. Perhaps with an eye to political acceptability, it is essentially a bigger, more targeted version of the government’s upfront discount. He suggests a £1,000 benefit to households falling into fuel poverty, which based on the above numbers could be 10mn, making a cost of about £10bn.
Everyone can then argue about how to pay for that. Anderson’s suggestion essentially apes the Treasury scheme, recouping perhaps £35-£40 each year from all households over ten years. If regulated by Ofgem, suppliers could get financing through a similar structure to that allowing them to borrow to cover the upfront costs of taking on customers of failed suppliers.
Given that this looks and feels like a tax, levied to benefit the most vulnerable in society, it might just be easier to use the systems designed for that purpose. Regardless, one lesson of the pandemic was that new government schemes needing to be rolled out quickly (which this does) work best when built on existing databases: it’s not clear how you’d easily define the universe of people who should receive the discount.
Using a combination of prepayment accounts, universal credit and warm homes discount recipients gets you only to about half the 10mn who could find their finances unacceptably stretched next winter, on ScottishPower estimates. Inevitably, you’d get a boundary issue, where struggling households caught on the wrong side of a definition see bills rise further without benefiting. Customers are already on the hook for the costs of abject regulatory failure and mopping up after reckless suppliers that failed to hedge their energy costs.
This is also not a one-winter problem. Forward gas prices for the winter after next are more than three times the equivalent price in May of last year, according to Martin Young at Investec.
“We don’t see wholesale prices returning to pre-crisis levels until the 2030s,” adds Tom Edwards at Cornwall Insight. “The world has changed and replumbing our energy system is not going to be cheap.”
The government has launched a long-term review of the electricity market. But there are other issues such as whether pricing should be decoupled from the marginal gas price, or if a social tariff would help tackle energy hardship, that will need addressing sooner.
Anderson is rightly frustrated by a lack of action addressing an urgent problem. “We know how bad this is going to be in October,” he says. We can’t duck the question of what happens after that either.