The true cost of the rising energy price cap
31 March 2022
From 1 April 2022, people all over the UK will see a huge increase in their energy bills as the energy price cap rises. People on lower incomes, many of them in vulnerable circumstances or with health conditions will be hardest hit as will those on prepayment meters.
As the government scrambles to find ways to tackle the impending fuel poverty crisis, new analysis from the Centre for Sustainable Energy (CSE) reveals the true cost of extortionate increases in standing charges and the disproportionate impact on people on low incomes.
CSE is a national charity supporting people and organisations across the UK to tackle the climate emergency and end the suffering caused by cold homes. For over 40 years, we’ve supported people to take effective action on energy in their homes. Our research and analysis focus on making the energy system greener, smarter and fairer.
Predictions suggest the average household energy bill will rise by £693 a year, chilling news for millions of people already struggling to heat their homes. Yearly bills for the average customer on a default tariff will rise from £1,277 to just under £2,000. Prepayment meter customers (typically on low incomes) will see an increase of £708 a year.
A major contribution to the increase in energy bills is an increase in standing charges which now include other costs including those associated with the recent collapse of many energy suppliers. This is particularly unfair for people on low incomes. It’s unlikely they benefited from cheap energy deals before these suppliers went bust, not to mention that standing charges have a disproportional impact on low-income households. This is because they generally use less energy, so the standing charge (the fixed element of their energy cost) represents a larger proportion of their bill.
While an annual energy bill of £2,000 is difficult for many households to deal with, it only represents 6% of a wealthier household’s income compared to 12% for a low-income household. This is really significant for people on already low incomes, who are already having to make tough choices about paying for energy or other essentials like food. They simply can’t cover any additional costs.
Every month, CSE’s advice service helps thousands of people reduce their bills and we’ve already seen unprecedentedly high numbers of people seeking energy saving or financial advice.
Fuel poverty is when people have to spend a high proportion of their income to keep their home warm. This is due to a combination of poor housing with inadequate insulation and heating, expensive energy tariffs, and low incomes, meaning people can’t afford to keep warm.
National Energy Action (NEA) estimates that the new price cap changes mean that 6.5m UK households are likely to be in fuel poverty. At CSE, we believe being able to afford to keep warm in winter is a basic right for everyone. It’s unacceptable that some people must choose between heating their home and eating.
Urgent support is needed to cope with the UK pandemic of fuel poverty. CSE is calling for policy shifts to even the impact of the energy price cap increase. But the only long-term solution to the fuel poverty pandemic is insulation. We need to stop energy waste from cold buildings and homes. If you insulate someone’s home, you are literally insulating them against the cost of energy.
CSE is calling for:
- Warm Front 2.0. A national insulation programme for England that delivers solid wall insulation to fuel poor households. This would boost employment and training via an accompanying apprentices programme.
- A separate price cap for prepayment meters. Due to the barriers prepayment meter customers face in accessing the energy market, Ofgem needs to re-establish a separate price cap for these customers to protect the most vulnerable households in the UK.
- Redesigning the standing charges. The extortionate standing charges need to be tackled and slimmed down so that customers are only paying the fixed costs to supply them.
- Funding for advice. Energy advice support services are overwhelmed and there is no national funding for in-depth fuel poverty support and advice. The government needs to establish a national network of local energy advice providers to support the most vulnerable households.
Extortionate standing charges and the disproportionate impact on people on low incomes
Given the 700% rise in wholesale gas costs, this increase in the energy price cap was inevitable. The price cap is the maximum amount that energy suppliers are permitted to charge per kWh of gas and electricity (known as the ‘unit rate’) per year. It also incorporates a maximum daily standing charge, a fixed daily amount that you have to pay, no matter how much energy you use. The standing charge covers the cost of supplying your property with gas and electricity – like a line rental, but for energy.
CSE believes that the increases in standing charges is unfair. Standing charges have a disproportional impact on low-income households because they generally use less energy. Therefore, the fixed element of their energy cost represents a larger proportion of their bill.
CSE’s research team designed a set of energy customer architypes for Ofgem back in 2020. The archetypes describe household characteristics, incomes and energy use. We used this to go 'beyond the mean' and look at the distributional impacts from the price cap changes. We’ve used the result for two of the ‘architype’ households:
- Wealthy families – High incomes, owner-occupied, middle-aged adults, full time employment, big houses, very high consumption, solar PV, environmental concerns.
- Isolated pensioners – Very low incomes, single female adult pensioners, non-switchers, prepayment meters, disconnected (no internet or smart phones).
Table 1 shows the increase in energy cost in each case. While an annual energy bill of £2,000 is difficult for almost all households to deal with, it only represents 6% of the wealthier household’s income compared to 12% for the low-income pensioner. But the standing charges, which we pay regardless of our consumption, are a much higher proportion of the pensioner’s bill.
Standing charges were originally designed to collect fixed costs associated with supplying a property with gas or electricity regardless of how much energy is consumed. For example, every customer needs an electricity meter to determine how much power they use, so this represents a fixed cost per account. The standing charge also includes the costs of maintaining the distribution network – the ‘pipes and wires’ in energy industry shorthand.
But since the Retail Market Review of 2012, Ofgem has allowed - wrongly in our opinion - the remit of the standing charge to expand and to cover not just fixed costs, but some variable costs, too.
We think it’s unfair.
We would also argue that while there’s obviously a fixed cost to maintaining the energy network, higher users should contribute more as their use has greater impact - for example in upgrading substations for car-charging.
We’re all paying for a market failure
Perhaps the most unfair element of the huge increase in standing charges are the Supplier of Last Resort (SOLR) costs. These come about when a gas or electricity company goes bankrupt and Ofgem places its customers with a new supplier. The cost of this is now recovered from everyone's electricity standing charge to the tune of about £68 per customer.
Over 30 energy companies have collapsed over the past year, almost all of them new entrants whose high-risk business model was based on luring customers to switch by offering excessively low rates. When the wholesale price of energy increased, these companies were unable to recoup their loses thanks to the price cap, and bankruptcy followed.
CSE believes that it is unfair that all households should pay for this market failure equally through the standing charge.
This is because poorer households switch less often than richer ones so, as a group, benefitted less from the lower prices that these new suppliers were offering before they crashed. If the government insists on reclaiming these costs via our bills, then they should be collected at the unit rate, and not through the standing charge.
By moving some energy supplier costs from the standing charge to the unit rate, the bills of people in fuel poverty could be reduced and those who consume more energy, and are responsible for higher carbon emissions, will pay more.
Table 2 shows the current standing charges and their potential reduction if a large proportion of these costs were shifted to the unit rate. This will obviously have an impact on people’s total bills if they use less energy than they did before.
Figure 1 below shows the proportion of the bill allocated to standing charges falling from 16.5% to 5.4% for the isolated pensioners.
Protecting prepayment meter customers
Since the energy market was privatised in 1999 – and despite increased competition and the ability to switch tariffs – Britain's 4 million prepayment meter customers have always paid more for the gas or electricity they purchase.
This is despite the fact that people living in homes with prepayment meters tend to be on lower incomes, and most likely to be in fuel poverty – as evidenced by the government’s 2021 annual fuel poverty report. They also have the largest fuel poverty gap which is the extra they pay compared to non-fuel poor households.
The energy companies' justification for this is that prepayment meter customers are more expensive to service due to the costs of the meters themselves, collecting cash payments, providing a 24/7 contact service and managing higher call volumes.
But given the infrastructure has been in place for over two decades one might expect to have seen this additional cost reduced to a marginal level. This hasn’t happened. Prepayment meter customers continue to be charged significantly more than customers on direct debits with online-only accounts.
To address this problem, Ofgem introduced a price cap for prepayment customers in 2017, though unfortunately this price cap ended on 1 January 2021, despite significant objection from National Energy Action (NEA) and other voices at the time.
This means prepayment meter customers have had to make a disproportionate contribution to energy policy costs, particularly policies they are not benefiting from to the same extent as other customers (for example, the fairly recent smart meter roll out.)
The accepted higher cost to serve prepayment meter customers, coupled with a single price cap, mean that the colossal price increases on 1 April are most stark for prepayment meter customers.
Most people who contact CSE’s advice service using prepayment meters are living on the lowest incomes and struggling with the cost-of-living crisis. The choice between heating their home or buying food to eat is a daily reality. At CSE, our advisors often speak to households who struggle to top up their meter. During the pandemic CSE was able to access funding for vouchers to help these households, giving them a vital lifeline.
NEA estimated that prepayment meter customers are going to face additional energy costs of more than £200m per year from April 2022 compared to direct debit or standard credit customers. Households with prepayment meters could be between £60-100 better off per customer if the prepayment meter cap was retained.
Perhaps most depressing of all is the abject failure of the government’s recent package of measures to help fuel poor households. The new ‘heat now, pay later’ loan is paid as a grant. Prepayment meter customers on older meters will struggle to access this payment. This means that up to 250,000 households could miss out whilst still paying for a loan they didn’t receive. That’s because the costs of the loan will be recovered from everyone’s accounts via, you guessed it, the standing charge!
Insulating ourselves against future price rises
The only long-term solution to the fuel poverty crisis is insulation. Recent commentators like Net Zero Watch are promoting a return to UK based fossil fuels as a solution the energy crisis. But they are out of touch and fail to understand the situation that many UK households find themselves in, they simply can’t afford to heat their home.
CSE has been working with people in cold homes for over 40 years. Reducing the prices now or changing energy supplier won’t deliver affordable warmth because it will still be too expensive for many households. We need to stop energy waste from cold buildings and homes. If you insulate someone’s home, you are literally insulating them against the cost of energy.
Who should be doing this and what’s needed?
For years the government has privatised the delivery of energy efficiency measures via the Energy Company Obligation. This is an obligation placed by the government on to the energy companies to provide funding to qualifying households for energy efficiency measures. But this drives down cost at the expense of quality. After all, why would an energy supplier want to deliver something that means you need less energy?
While the government has recently announced the Home Upgrade Grant Scheme (HUGS) which offers funding for local authorities to install energy efficiency measures to local residents, there is no national scheme in England to support low-income households that need solid wall insulation.
To combat this and help grow the supply chain so we can ‘build back better’, we need an ambitious programme to help us insulate every fuel poor home by 2030. It should provide at least £3.6bn for a new grant programme to insulate existing homes, available to all households. The scheme would be large enough to support a major apprentice programme, giving new jobs and opportunities to thousands. It would also command the buying power to increase manufacturing capacity in the UK for vital materials.
The Committee on Fuel Poverty’s 2020 Annual Report forecast that the 2020 milestone for energy efficiency improvements in fuel poor households will be missed and said that little progress is being made towards the UK’s legally binding 2030 target. Without approval of new funding streams and new regulations, they forecast that the 2025 milestone and the 2030 target of improving fuel poor households to an EPC band C will also be missed.
Meanwhile, the Department for Business, Energy & Industrial Strategy (BEIS) Annual Fuel Poverty statistics report shows that properties with uninsulated solid walls had the highest rate of fuel poverty (22.5% of households) with an average gap of £292, whereas those with insulated solid walls are less than half as likely to be fuel poor. The latest detailed fuel poverty statistics, based on the “Low Income Low Energy Efficiency” definition, identifies two million uninsulated walls.
The devolved nations both have successful fuel poverty schemes. Warmer Homes Scotland and Home Energy Efficiency Programmes (HEEPS) for Scotland have supported 125,000 households since 2013 with over £500m in funding. This has had a huge impact on the supply chain for measures like solid wall insulation. England needs parity with a national scheme to tackle fuel poverty through insulation, for example a Warm Front 2.0 which tackles 200,000 properties a year. (From 2000, Warm Front was the primary scheme by which the Government in England improved the energy efficiency of households in or at risk of fuel poverty. It closed in 2013.)
Feedback from our energy advice service
At CSE we tackle the root causes of cold homes. This involves increasing people’s awareness of energy efficiency or helping to insulate or improve their home. We run a free energy advice line, mostly for people in the south west of England who are experiencing high energy bills and cold homes. Around 7 million people live in the area we cover.
We’ve seen a significant increase in the number of calls and enquiries over the last three years and we’re finding it takes much longer to help people due to their increasingly complicated circumstances.
In the last financial year (April 2020 to March 2021), CSE has seen a 43% increase in enquiries, saving people in fuel poverty almost £3m (£2,761,712) off their energy bills cumulatively, an average of around £190 per household.
- We saw a 50% increase during the first lockdown, but this has increased again as a result of the energy crisis.
- Winter is always our busiest time, but this February alone we spoke to 3,931 clients making 5,443 separate enquiries (that’s a quarter of last year’s total enquiries in one month).
- But it’s not just the increase in demand there’s been a big shift in the type of advice we are giving.
- We’ve seen a fourfold increase in demand for advice on financial support and energy debt.
- During the first lockdown we strengthened our partnerships with food banks, we are now making ten times more foodbank referrals than we did previously.
And the nature of the calls is changing, too. Callers are increasingly in distress and having to make tough choices about essentials like energy, food and clothes.
- We are speaking to people whose mental health is suffering because of the cost-of-living crisis.
- A few years ago, it was rare for us to speak to someone who was feeling suicidal; now it’s a regular occurrence. Our advisors have all received suicide awareness training and our safeguarding policy has been expanded to add additional layers of support.
- Our advisors often have to deal with people’s immediate crisis with their energy supplier. If we don’t stop the threatening letters or the bailiffs, then people we support won’t have the mental bandwidth to engage with us.
- Rather than speak to a caller once or twice, we are now speaking to them on multiple occasions to deal with a variety of complex issues.
Our funding isn’t sufficient to speak to every caller on multiple occasions. As a result, charities like ours are being forced to make tough choices about who is eligible for in-depth casework.
Partnerships and financial support
- We have huge numbers of people calling us to ask for prepayment meter (PPM) vouchers. This is now an essential part of our service. Whilst people we support are waiting for in-depth casework support, we give them immediate relief via PPM vouchers and foodbank referrals.
- Through the Ofgem Energy Redress fund we’ve given away £140,000 in PPM vouchers in the last year.
- During lockdown CSE was able to keep offering support through our advice line. Many other public advice agencies operating face to face from drop-in centres closed when lockdown hit. The CSE advice line became one of only a few options for people in need. This increased referrals from other partners.
There’s no funding nationally to support fuel poverty advice. This means people across the UK face a postcode lottery when they need support. It also means CSE is continually searching for funding to keep our service going.
Here are some stories from a sample of calls to our advice line in February 2022 (names have been changed)
Energy bills crisis: In this short video, CSE's Lisa Evans explains how our advice team is responding to the increase in demand for our services.