Sunday, June 26, 2022

How can the government cut soaring gas and electricity bills?

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UK electricity and gas prices have soared this spring after regulator Ofgem revised its energy price cap.

The cap, which sets the maximum amount a utility can charge an average UK customer per year, rose dramatically by 54 per cent, from £1,277 to as much as £1,971. That’s an increase of £693 per year for the average customer.

In response to rising wholesale gas prices around the world, driven by increased demand and reduced imports to Europe, the review was implemented on April 1, 2022, potentially challenging up to 22 million households to meet their commitments.

Chancellor Rishi Sunak has since announced £150 council tax rebates will be given to homes in Bands A to D and plans to offer a £200 rebate on bills.

A state-backed loan scheme of this magnitude will cost around £5-6 billion, well below the £20 billion demanded by the energy industry, which has already criticized the announcements.

Dale Vince, the boss of Ecotricity, already called the measures “far too little, far too late”.

Labor Shadow Chancellor Rachel Reeves also called Mr Sunak’s plans in the House of Commons a “buy now, pay later scheme that will drive up tomorrow’s costs”.

By how much will energy costs increase?

From April 1, bills from households currently on a standard variable tariff rose sharply by 54 per cent, or £693, from £1,277 to as high as £1,971.

For around 4 million customers with prepayment meters, there was a £708 increase from £1,309 to £2,017.

The announced new cap was calculated by Ofgem using a formula based on market prices and expected costs to suppliers.

What if I don’t have a Standard Variable Rate?

People who shop around and switch deals away from the standard variable tariffs have previously been able to find deals hundreds of pounds cheaper than the energy price cap. These deals have now all been withdrawn as energy supply costs have risen.

When term contracts expire, customers are moved to a standard variable rate at the price cap level. The option to browse is still available, but other offerings will be more expensive, so customers are currently advised not to switch.

What alternative measures have been proposed?

VAT reduction

Energy UK, the trade body for suppliers, earlier called for VAT on household bills to be reduced from 5 per cent to zero.

Businesses pay 20 percent sales tax on their energy bills, and the government offers a 5 percent rate for businesses that use a limited amount of electricity. Businesses are not protected by the energy price cap.

But in last October’s budget, Mr Sunak resisted calls for energy tax cuts. Whitehall sources said at the time the cut would be ill-targeted, helping people who could afford to pay as well as those who will fight.

Green levies

Suppliers also called for levies to finance renewable energy investments and energy efficiency improvements to be removed from bills. The investment would instead be paid for out of general taxation.

They argued that this would be more progressive because those with higher incomes would contribute proportionately more. The levy is a basic necessities tax that accounts for a significant portion of the sum payable by low-income households.

E.On CEO Michael Lewis, meanwhile, called for a “polluter pays” approach that would have included a higher carbon tax to offset the money lost from bill levies.

Suppliers estimate that scrapping green taxes and reducing VAT to zero could cut bills by an average of £250-300.

distribute costs

Energy UK also proposed an industry-wide funding scheme that would allow suppliers to spread the cost of gas price spikes and supplier defaults over a number of years.

Currently, the price cap mechanism means that these costs will all end up on people’s bills over the next year.

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