Government must act to protect essential energy consumption for all

Seven months in, and the toll stemming from the US assault on Iran is building. Lives and livelihoods lost in and around Iran, and now a rapidly building energy supply chain crisis. International gas prices have surged in recent weeks, reaching 140% above their pre-assault level and pressure is building on the UK government to act as household bills, once again, face incredible strain.

In July, regulator Ofgem raised the energy price cap, the maximum rate suppliers can charge to customers on a standard variable tariff, by 13%, citing the effects of the conflict on wholesale gas prices. It will do so again today [Thursday], lifting the cap a further 4% for the last three months of the year.

But the worst may yet be to come. Multiple major forecasters are now predicting double-digit increases in the energy price cap for the first quarter of 2027. Recent estimates put the January rise in the 20 – 25% range — set ultimately by the surging prices registered from August until November.

Much media attention has been devoted to the upcoming energy price cap decision, with outlets warning about the highest prices since the 2022 – 23 spike that followed Russia’s invasion of Ukraine. But this rhetoric may understate the true impact of the impending rise. According to NEF’s own analysis, unless the government acts quickly, British households face significantly higher energy bills than those seen three years ago.

To understand why this is so we must navigate some complexities in how energy bill changes are presented to the public in the UK. The energy price cap is applied to unit rates (pence per kWh gas/​electric), but the regulator generally expresses it as an annual bill derived from its typical domestic consumption values (TDCV). This reflects the total yearly amount a household would be expected to pay at a fixed ​“typical” consumption level.

For the first quarter of 2027, Bloomberg Economics’ price cap forecast would bring the annual bill to £2,150, more than £400 above the current £1,723 ​“typical” bill.

On the face of it, this moves us closer to the £2,500 level at which the government set the energy price guarantee (EPG) back in 2022. But to understand why households may actually feel worse off than back then, we need to dig a little deeper.

Beginning in October 2023, Ofgem twice revised its TDCV downward. This adjustment was made to account for historic changes in average household consumption. But it has confused matters, because consumption has actually remained stable since 2022/​23. NEF modelling suggests that, on a like-for-like consumption basis, bills are likely to reach, or even exceed, the previous £2,500 benchmark.

However, thanks to a second overlooked factor, households are going to feel even worse off. In 2022 – 23 customers were shielded from the full brunt of the increases not just by the EPG but also by the energy bill support scheme – which offered a £400 discount on electricity bills – providing a level of further protection during the toughest months.

Further confusing matters is the fact that the ​“typical bill” is an annualised estimate which assumes that the price cap remains in place for 12 months. In reality, the cap changes every quarter, so no household ever truly faces the 12-month equivalent bill.

NEF’s new analysis therefore irons out all of these inconsistencies and looks at the true bill faced by households over a given 12-month period. This analysis factors in past government energy bill support schemes, compares bills on a consistent consumption basis, and weights by quarterly price and consumption.

On this basis, the typical 12-month bill peaked at around £1,800 during the last crisis, but is set to reach around £2,000 in 2027, around 11% higher than the previous peak. In nominal terms, households will be significantly worse off unless either international prices come rapidly down over the next six weeks, or government intervenes.

Adjust the expected rise in bills for the growth in household income since the last crisis and you might argue households are set to be about as badly off as they were at the worst point of the Russia-Ukraine crisis. At that point however, government was not only giving out energy bill support, but also hundreds of pounds in cash payments and council tax rebates to millions of lower income households.

Figure 1: Energy bills are on course to significantly exceed their level in 2022/​23

Looking ahead, January’s projected price cap increase would also comfortably outweigh the savings generated by the government’s recent cost-cutting measures, including the temporary VAT rebate on household electricity rates (expected to save the average household £45 a year), and the £150 cut to the energy ​“levies” on the annual bill. It could also risk further tipping inflation, which rose to 3.1% in August on the back of surging energy costs, close to or above 4%. This would be double the Bank of England’s target.

However, the Treasury does have powers available to rein in the impact of the current shock. Tax and levy cuts can help lower energy costs, but they offer minimal assistance in the face of a crisis on this scale. A bolder and ultimately more effective approach, as NEF and others have called for, would be to implement a National Energy Guarantee (NEG), which would offer all households a basic amount of energy at a fixed low cost while only allowing market prices to bite at higher levels of consumption.

The ​“block discount” model underpinning the NEG, where support is focused on core consumption, was implemented in several European countries during the last energy crisis. And it is standard beyond the continent’s borders. Middle-income countries, including Mexico and India, have applied similar proposals for decades, as have richer economies such as South Korea or Japan.

Longer term, the NEG holds particular promise in our current situation, in which the UK grid is expected to see a growing influx of ultra-cheap clean power from new solar and onshore wind projects. As it currently stands, such electricity would be sold to the market at current rates, rather than at its true, and much lower, cost. Under the NEG, however, this power could be earmarked for a basic tariff, and offered to households at rates well below the current prices (or even for free, as seen recently in Australia).

In a world buffeted by the increasingly fierce winds of geopolitical turbulence and ecological breakdown, energy shocks are becoming the norm. The government may not be able to restore normality to the global market for fossil fuels, but it can offer support, restructure bills, and leverage the UK’s growing renewable base to ensure that households are not made to suffer for Trump’s aggression.

Image: iStock