What is the energy price cap?
It sets a limit to how much energy firms can charge customers for gas and electricity and was introduced in 2019 to help households who do not regularly switch suppliers. These 11 million or so customers — typically vulnerable, elderly or simply overly busy — have tended to pay the highest bills by languishing on a supplier’s default, standard variable tariff (SVT).
The price cap rose in October 2021 from £1,223 to £1,370. It is expected to rise to more than £2,000 in April, based on current wholesale energy prices.
Cornwall Insights, an analyst, has predicted there could be another spike when the cap is revised in October, taking the average bill to £2,240 a year.
Why are suppliers failing?
As suppliers cannot charge customers on the SVT more than the cap, they must absorb the rising cost of wholesale energy themselves — and the cost of natural gas on the wholesale market is up by more than 400 per cent in a year, while electricity prices are up about 350 per cent.
Suppliers are charging up to the maximum they are allowed to under the cap, but this is not enough to keep many of them afloat. Last year saw nearly 30 energy firms fold, supplying between them 4.3 million customers. The largest of these was Bulb Energy, which had about 1.7 million customers.
Some suppliers have been tempting customers with fixed-rate deals not subject to the cap. These tariffs are significantly more expensive than the SVT and play on customer fears of even sharper increases in the future.
How does my energy bill break down?
Of the £1,370 people pay on a standard bill on average, £528 covers wholesale costs.
The second biggest element is the cost of the pipes and wires that are used to supply power to homes. This covers £268 of the average bill. Operating cost for the suppliers, which includes metering services and customer services, account for another £204, and policy costs — money that goes towards green tariffs and other measures applied by the government — is the fourth largest part of the bill, accounting for £204.
VAT at 5 per cent accounts for £65, and £25 covers the profits, excluding tax. The rest of the bill covers other administrative and billing costs.
Why are energy bills going up?
At the crux of the problem is Britain’s lack of energy storage and our increased use of imported energy. This has left us reliant on the vagaries of the world energy market and competing with big buyers, particularly in Asia.
The Rough energy storage facility off the Yorkshire coast, owned by Centrica, the parent of British Gas, provided 70 per cent of the UK gas storage capacity for more than 30 years before it shut in 2017. The closure followed a government decision not to subsidise the costly maintenance and upgrades needed to keep the site going.
The UK’s current stores hold enough gas to meet the demand of four to five winter days. France has 14 weeks’ worth, Germany eight and Italy 11.
For decades, the UK had been able to avoid investment in costly storage in favour of tapping its domestic North Sea reserves for gas on demand, but this has also been wound down in recent years in favour of renewable alternatives.
Europe as a whole is also increasingly reliant on Russia, and on intermittent wind and solar power. The recent spike in prices follows Russia continuing to cut its supplies to Europe: supplies via Ukraine remain constrained after Kremlin-backed Gazprom recently cut its supply to Europe to its lowest level since January 2020.
The UK has also been slow to develop domestic nuclear capabilities. The £22 billion Hinkley Point C plant in Somerset is already well over budget and a decade late. Now, recently discovered defects mean that the scheduled date for starting electricity generation, June 2026, may have to be revised.
Who pays the costs for failed suppliers?
For years, Ofgem has been under pressure to boost competition in the energy market. Its plan was to make it easier for new suppliers to come onto the market and challenge the dominance of large suppliers such as British Gas.
This meant that people with little or no experience of the energy market were able to set up businesses, sometimes from their living rooms.
Realising that some of these new businesses would inevitably fail, in 2016 the regulator introduced a mechanism that meant anyone whose supplier failed could be taken over by another firm, with any customer debts covered by an industry levy. The cost of this is paid for by suppliers but is ultimately passed on to consumers.
The number of suppliers shot up from just ten in 2006 to 70 in 2018. However, since then dozens of suppliers have failed or been taken over by larger rivals. There are now about 30 suppliers left, but some analysts suggest this number could fall to ten.
Customers can be transferred to another firm in a process overseen by Ofgem. This ensures no one is left without power. The supplier taking over a failed firm’s customers can tap into the industry levy to cover any outstanding credit on a customer’s bill.
Citizens Advice estimates that supplier failures since August 2021 will cost consumers £2.6 billion — about £94 per customer — from 2022. This does not include the £1.7 billion of taxpayer money the government has set aside for Bulb, which has been put into special administration to keep it going until another supplier takes over its customers — known as a supplier of last resort.
Ironically, the suppliers of last resort tend to be those who have the financial might to absorb taking on new customers: essentially the big suppliers Ofgem was trying to move customers away from.
In some ways, then, the failure of small suppliers has been a boon for the larger companies, as they have been able to acquire hundreds of thousands of new customers without having to pay a penny on advertising, while the debts of these customers are covered by the industry levy ultimately passed on to consumers.
How can the government help?
Some have suggested that the government subsidises energy costs. Norway is directly subsidising the energy bills of all households in the country until March at a cost of about £415 million. However, an equivalent measure in the UK would be significantly costlier, as the population here is so much bigger.
Another option being explored is whether energy suppliers should be forced to absorb the cost of the industry levy that covers the cost of failed supplier debts. This could save about £65 per household.
Several energy companies, including E.ON and EDF, want the green levies they pay Ofgem for investing in renewable technology to be suspended. The Labour Party wants the government to follow ten EU countries, Spain, Italy, Portugal and Germany among them, in cutting or suspending the 5 per cent rate of VAT on household energy bills. These two measures could save another £269 per household.
More intensive exploration of North Sea oil and gas — including approving the controversial Cambo field near Shetland — has also been discussed.
The crisis may lead companies to come up with better energy-storage solutions and could also create more leniency when it comes to granting licences for fracking, where gas is extracted from shale rock by injecting water, sand and chemicals under high pressure.
Ministers banned fracking in 2019, but firms involved in the sector have threatened legal action.
Simple answer is that all of these price caps go up. They never go down.
The only price cap that ever stays the same are wages and wage growth, particularly in the public sector.
Because companies go bankrupt when they’re forced to sell a product for less than they purchased it?
> The price cap rose in October 2021 from £1,223 to £1,370.
More bad reporting in the price cap. This is not how the price cap works. The daily standing charge and per-unit price are capped. Not the total amount you can be charged in a year, which is what this and so many articles make it sound like. £1223 and £1370 are based on energy use of what is considered a typical household. The Ofgem website is little better as it also uses the example per year prices a lot and they do not publish the per-unit cap prices. And there are different caps for different regions and circumstances.
Because of inflation.
Inflation causes price of expenses to rise causing profit margin to fall.
In deference to their Shareholders, Energy Companies cannot allow this to happen. So the price of energy must rise.
Everybody uses Energy. So when the Shareholders get a guaranteed slice of profit and profit growth everybody else needs to generate that profit to pay their energy bill. Which actually means that the prices of goods and services to the Energy companies rises. Which is just inflation again.
If only there was ony a way to stop profits from rising, but, alas, there is no possibility of that. Because if there were no rise in profits nobody would invest and it would all… etc.
5 comments
Article text:
What is the energy price cap?
It sets a limit to how much energy firms can charge customers for gas and electricity and was introduced in 2019 to help households who do not regularly switch suppliers. These 11 million or so customers — typically vulnerable, elderly or simply overly busy — have tended to pay the highest bills by languishing on a supplier’s default, standard variable tariff (SVT).
The price cap rose in October 2021 from £1,223 to £1,370. It is expected to rise to more than £2,000 in April, based on current wholesale energy prices.
Cornwall Insights, an analyst, has predicted there could be another spike when the cap is revised in October, taking the average bill to £2,240 a year.
Why are suppliers failing?
As suppliers cannot charge customers on the SVT more than the cap, they must absorb the rising cost of wholesale energy themselves — and the cost of natural gas on the wholesale market is up by more than 400 per cent in a year, while electricity prices are up about 350 per cent.
Suppliers are charging up to the maximum they are allowed to under the cap, but this is not enough to keep many of them afloat. Last year saw nearly 30 energy firms fold, supplying between them 4.3 million customers. The largest of these was Bulb Energy, which had about 1.7 million customers.
Some suppliers have been tempting customers with fixed-rate deals not subject to the cap. These tariffs are significantly more expensive than the SVT and play on customer fears of even sharper increases in the future.
How does my energy bill break down?
Of the £1,370 people pay on a standard bill on average, £528 covers wholesale costs.
The second biggest element is the cost of the pipes and wires that are used to supply power to homes. This covers £268 of the average bill. Operating cost for the suppliers, which includes metering services and customer services, account for another £204, and policy costs — money that goes towards green tariffs and other measures applied by the government — is the fourth largest part of the bill, accounting for £204.
VAT at 5 per cent accounts for £65, and £25 covers the profits, excluding tax. The rest of the bill covers other administrative and billing costs.
Why are energy bills going up?
At the crux of the problem is Britain’s lack of energy storage and our increased use of imported energy. This has left us reliant on the vagaries of the world energy market and competing with big buyers, particularly in Asia.
The Rough energy storage facility off the Yorkshire coast, owned by Centrica, the parent of British Gas, provided 70 per cent of the UK gas storage capacity for more than 30 years before it shut in 2017. The closure followed a government decision not to subsidise the costly maintenance and upgrades needed to keep the site going.
The UK’s current stores hold enough gas to meet the demand of four to five winter days. France has 14 weeks’ worth, Germany eight and Italy 11.
For decades, the UK had been able to avoid investment in costly storage in favour of tapping its domestic North Sea reserves for gas on demand, but this has also been wound down in recent years in favour of renewable alternatives.
Europe as a whole is also increasingly reliant on Russia, and on intermittent wind and solar power. The recent spike in prices follows Russia continuing to cut its supplies to Europe: supplies via Ukraine remain constrained after Kremlin-backed Gazprom recently cut its supply to Europe to its lowest level since January 2020.
The UK has also been slow to develop domestic nuclear capabilities. The £22 billion Hinkley Point C plant in Somerset is already well over budget and a decade late. Now, recently discovered defects mean that the scheduled date for starting electricity generation, June 2026, may have to be revised.
Who pays the costs for failed suppliers?
For years, Ofgem has been under pressure to boost competition in the energy market. Its plan was to make it easier for new suppliers to come onto the market and challenge the dominance of large suppliers such as British Gas.
This meant that people with little or no experience of the energy market were able to set up businesses, sometimes from their living rooms.
Realising that some of these new businesses would inevitably fail, in 2016 the regulator introduced a mechanism that meant anyone whose supplier failed could be taken over by another firm, with any customer debts covered by an industry levy. The cost of this is paid for by suppliers but is ultimately passed on to consumers.
The number of suppliers shot up from just ten in 2006 to 70 in 2018. However, since then dozens of suppliers have failed or been taken over by larger rivals. There are now about 30 suppliers left, but some analysts suggest this number could fall to ten.
Customers can be transferred to another firm in a process overseen by Ofgem. This ensures no one is left without power. The supplier taking over a failed firm’s customers can tap into the industry levy to cover any outstanding credit on a customer’s bill.
Citizens Advice estimates that supplier failures since August 2021 will cost consumers £2.6 billion — about £94 per customer — from 2022. This does not include the £1.7 billion of taxpayer money the government has set aside for Bulb, which has been put into special administration to keep it going until another supplier takes over its customers — known as a supplier of last resort.
Ironically, the suppliers of last resort tend to be those who have the financial might to absorb taking on new customers: essentially the big suppliers Ofgem was trying to move customers away from.
In some ways, then, the failure of small suppliers has been a boon for the larger companies, as they have been able to acquire hundreds of thousands of new customers without having to pay a penny on advertising, while the debts of these customers are covered by the industry levy ultimately passed on to consumers.
How can the government help?
Some have suggested that the government subsidises energy costs. Norway is directly subsidising the energy bills of all households in the country until March at a cost of about £415 million. However, an equivalent measure in the UK would be significantly costlier, as the population here is so much bigger.
Another option being explored is whether energy suppliers should be forced to absorb the cost of the industry levy that covers the cost of failed supplier debts. This could save about £65 per household.
Several energy companies, including E.ON and EDF, want the green levies they pay Ofgem for investing in renewable technology to be suspended. The Labour Party wants the government to follow ten EU countries, Spain, Italy, Portugal and Germany among them, in cutting or suspending the 5 per cent rate of VAT on household energy bills. These two measures could save another £269 per household.
More intensive exploration of North Sea oil and gas — including approving the controversial Cambo field near Shetland — has also been discussed.
The crisis may lead companies to come up with better energy-storage solutions and could also create more leniency when it comes to granting licences for fracking, where gas is extracted from shale rock by injecting water, sand and chemicals under high pressure.
Ministers banned fracking in 2019, but firms involved in the sector have threatened legal action.
Simple answer is that all of these price caps go up. They never go down.
The only price cap that ever stays the same are wages and wage growth, particularly in the public sector.
Because companies go bankrupt when they’re forced to sell a product for less than they purchased it?
> The price cap rose in October 2021 from £1,223 to £1,370.
More bad reporting in the price cap. This is not how the price cap works. The daily standing charge and per-unit price are capped. Not the total amount you can be charged in a year, which is what this and so many articles make it sound like. £1223 and £1370 are based on energy use of what is considered a typical household. The Ofgem website is little better as it also uses the example per year prices a lot and they do not publish the per-unit cap prices. And there are different caps for different regions and circumstances.
Because of inflation.
Inflation causes price of expenses to rise causing profit margin to fall.
In deference to their Shareholders, Energy Companies cannot allow this to happen. So the price of energy must rise.
Everybody uses Energy. So when the Shareholders get a guaranteed slice of profit and profit growth everybody else needs to generate that profit to pay their energy bill. Which actually means that the prices of goods and services to the Energy companies rises. Which is just inflation again.
If only there was ony a way to stop profits from rising, but, alas, there is no possibility of that. Because if there were no rise in profits nobody would invest and it would all… etc.