Blog Post

A 34% hike in the energy price cap is needed to save struggling energy suppliers

Richard Simmonds • October 11, 2021

The energy price cap came under renewed criticism over the weekend with leaders in the industry saying that it does nothing to protect households from rising costs and that it is not fit for purpose.

Not fit for the industry, not fit for customers

The unprecedented surge in gas prices has resulted in nine energy suppliers being forced out of the market in the space of a month. As a result, over 1.7 million customers have been put onto Ofgem’s SoLR scheme and virtually all will end up paying higher energy bills.

Every time a supplier goes bust it ripples through the wider market, raising costs that are then passed onto the consumer. Even with the price cap and any other policy the government may think of they will not be enough to negate those costs.

There is now between £1bn and £3bn in costs as a result of failed suppliers that will need to be placed upon businesses and households.

“The price cap as a mechanism is not for industry, nor is it fit for customers. When the converse situation arises and the wholesale price starts to drop sharply, the price that will be passed through to customers in April might feel like a very, very poor deal, whereas at the moment the price cap feels like a price that is too good to be true,” said the chief executive of Together Energy in an interview with BBC Radio 4’s Today programme.

Also read: Energy Price Cap rises to record high but it’s far below what is needed

What is the government doing?

The short answer to this is, not a lot. Instead, the government is rumoured to be considering putting new levies on already record-high gas bills in an attempt to get consumers to move away from conventional gas boilers by 2035.

The levies will help fund low carbon heating such as the currently highly expensive heat pumps. They aim to cut the cost of electricity bills to offset the rise in gas bills.

The move comes as the government prepares to host the Cop26 climate conference in November. After the utter failure of the Cop25 conference held in 2019, ministers will be hoping to kick its green agenda into full gear and win support from other nations.

One government source told The Times that the plans were “madness” and that Downing Street was failing to appreciate “the reality of the problem we’re facing with energy prices”. The source said: “There is still a sense that we just ride it out and it’s better in a few months. But it’s very clear that it’s going to get worse before it gets better.”

The government’s lack of action over the ongoing crisis has not only created anger from within the energy supply industry but many other industries as well.

Businesses that are energy-intensive such as glass and steel makers are warning that they have to halt production within a matter of days if no help is offered.

“What we’re asking Kwasi Kwarteng today to do on wholesale prices is just to step in, to alleviate that pressure in the short-term, just like in, say, Portugal or Italy. Their governments are already investing many billions of euros, to help their industries and the UK government has yet done nothing. We can’t wait until Christmas and beyond. Or even a few weeks. We need action now, it needs to be swift, decisive action. At the moment, there’s an energy crisis. If the government does nothing, tomorrow there’ll be a steel crisis,” said UK Stell boss Gareth Stace.

Also read: Green Gas Support Scheme & Green Gas Levy for Energy Suppliers

A price cap for SMEs? Not likely

Meanwhile, the British Chambers of Commerce has called for an energy price cap to be introduced to small and medium-sized businesses to help them ride out the crisis.

Countless businesses have seen their energy bills skyrocket as a result of rising gas prices, with many saying that they are now operating at a loss just to keep the lights on and with winter approaching the heating.

With energy prices soaring, lurking in the background is inflation which looks set to leap higher over the winter and put many more people and businesses under financial pressures.

The BCC warned that Britain has now reached a “crisis point”, adding that there was a clear case to create an energy price cap for SMEs.

Pressure on the government to do ‘something’ is growing but whether Boris and co will do anything about the crisis engulfing the nation is yet to be seen.

Also read: Ofgem warns of more energy supplier failures and admits to needing a new approach