Millions in the UK face poverty because of the energy crisis
It is estimated that when the energy price cap increases in April, two million more households around the UK might be pushed into fuel poverty. That would mean fuel poverty will affect the total of 6.5 million households around the country.
The rise of the energy price cap was introduced in response to rising wholesale energy prices, which make it unaffordable for suppliers to purchase energy they then deliver to customers.
Ofgem explained the price cap adjustment saying that:
‘Since the price cap was last updated in August, the current level does not reflect the unprecedented record rise in gas prices which has since taken place.
Under the price cap mechanism, energy companies will be allowed to pass on these higher costs from April when the new level takes effect.
This is because energy companies cannot afford to supply electricity and gas to their customers for less than they have paid for it.
Over the last year, 29 energy companies have exited the market or been put in special administration in the wake of soaring global gas prices, affecting around 4.3 million domestic customers.’
The change means that from April onwards, an average energy bill will be almost £2000 a year. That will be much more expensive than the current £1,277. With gas and electricity bills getting significantly higher, many will struggle to pay for basic services such as heating, rent, or food.
Even Ofgem admitted that ‘this rise will be extremely worrying for many people.’ Ofgem also said that they were going to do what they can to help the most vulnerable families. The UK government also introduced some solutions that are supposed to help households cover their energy bills. But are these enough to protect them from facing poverty?
What is the UK government doing to deal with the crisis?
When people started raising concerns after the information about the new price cap was shared on the news, the UK government announced a series of solutions designed to help households deal with higher energy bills.
The three options proposed by Rishi Sunak, Britain’s Chancellor, are:
- £350 off energy bills – £150 reduction will be offered in April right after the bills get more expensive and the other £200 households will be able to access in October. Households that use the £200 will have to pay it back in installments later on, starting in 2023
- Warm Home Discount – allowing households to get £140 off their electricity bill for winter 2021 to 2022. It is a one-off discount on electricity bills, between October and March. The Warm Home Discount is available to low income families
- VAT cut – the UK government is considering making VAT on energy lower but that would cost the state a lot of money.
When Sunak introduced these ideas he said: ‘I really believe that what we’re doing, £350, it’s a significant amount of money that will make a big difference to the vast majority of households, and I think people, I hope actually, will be reassured by us stepping in.’
How does the energy price cap work?
‘The cap, which is announced every six months, sets the prices that suppliers can charge for each unit of energy as well as the standing charge. This is then translated into the expected annual bill for a household that uses the typical amount of gas and electricity.
That does not mean there is a limit to how much people can pay. The more gas and electricity that is used, the higher the bill,’ writes BBC.
‘Anyone who is on a standard variable tariff, whose fixed deal has come to an end (or is about to), and those moved because their old supplier went bust will be affected by the new higher cap,’ BBC further explains.
Fuel poverty across the UK
Fuel poverty refers to the situation where households must spend most of their household income to keep their home warm and when after paying their bills they have no or very little money to cover other essential services such as food. Fuel poverty is affected by three main factors: household’s income, their energy costs, and their average energy consumption.
The rates of fuel poverty vary across the UK.
| Country | % of households affected by fuel poverty |
| England | 10 |
| Scotland | 24 |
| Wales | 12 |
| Northern Ireland | 18 |
These numbers are expected to get higher after April. In addition to the energy price cap getting higher, ‘the Covid-19 pandemic has caused widespread financial hardship. Many consumer groups argue that the pandemic has worsened fuel poverty and more needs to be done,’ House of Commons admits.
It also adds that ‘Several stakeholders have recommended that Governments do more on fuel poverty, pointing to wider potential benefits such as for health from avoiding cold homes, and decarbonisation from more energy efficient homes. New Fuel Poverty Strategies have been published in Wales and England in 2021. Scotland has published a draft new fuel poverty strategy with the final strategy expected, and Northern Ireland is also expected to update its strategy.’
Poorest families will be affected the most
While there is no doubt that everyone in the UK will feel the consequences of energy bills getting more expensive, the poorest families will struggle the most. For them, even now paying for rent and bills, especially during winter months, is challenging.
According to an analysis from the Joseph Rowntree Foundation, ‘households on low incomes will be spending on average 18% of their income after housing costs on energy bills after April. Lone parents and couples without children will spend around a quarter of their incomes on energy bills, an increase of almost 10 percentage points in the same period,’ JRF reported.
Then, those who can now be classified as low-income but not yet poor families risk being pushed into poverty after prices rise. After all, the change to energy bills is dramatic.
As for middle-income households, they will be spending an average of 6% of their total income on energy bills, so significantly less than the poorest families. Those who earn more than most of the population, will probably barely feel the impacts of the energy price cap rise.
JRF also warned that ‘without additional support, people already in poverty are likely to find a sharp increase in energy bills very difficult to cope with. People living in deep and persistent poverty were already under constant pressure trying to afford food, bills and other essentials. With the impact of rising energy bills expected to be much harsher for families on low incomes, there is a clear case for targeted protections to prevent serious hardship once the energy price cap is lifted.’
Urgent need to help those facing poverty
The already high energy prices are expected to get even higher by the end of the year. ‘Energy price cap could soar to over £3,000 a year with gas costs rising as result of Ukraine war,’ iNews reported. Hence, stepping up efforts to help the poorest families across the UK pay for their bills is essential.
‘The measures put forward by the Government, of which the repayable £200 rebate on electricity bills is little more than a poorly disguised loan, are insufficient in quantum, and most definitely fall short of addressing distributional fairness, said Martin Young, senior analyst at Investec.
It is time to introduce new solutions that can actually have an impact and help the poorest families navigate through this difficult situation. Otherwise, the UK will face not only an energy but also a poverty crisis.