The UK economy shrank by a record 24% in April, Energy Supplier calls for changes to the Price cap increase

Recession

The economic impact of the Covid-19 lockdown has been worse than feared according to the Office for National Statistics (ONS).

April’s economic contraction is a staggering three times worse than the total decline seen during the 2008-2009 ‘Great Recession’.

In the three months from February to April, the economy declined by 10.4% as the lockdown measures hadn’t truly taken effect yet.

Economists expect an even bigger slump in the April-to-June period that will plunge the country into a deep recession.

One bright point is that economists are forecasting that April would be the worst month and a revival will occur gradually over the coming months as lockdown is eased further and some sense of normality returns.

"In line with many other economies around the world, coronavirus is having a severe impact on our economy. The lifelines we've provided with our furlough scheme, grants, loans, and tax cuts have protected thousands of businesses and millions of jobs - giving us the best chance of recovering quickly as the economy reopens. We've set out our plan to reopen the economy gradually and safely. Next week, more shops on the High Street will be able to open again as we start to get our lives a little bit more back to normal," said the Chancellor Rishi Sunak.

Job losses

The Covid-19 lockdown has already caused several energy suppliers to make redundancies and furlough thousands of staff.

The most recent Energy supplier to announce job losses is British Gas, whose owner Centrica announced that it was to cut 5,000 jobs from its 27,000 strong workforce over the year due to what it says is an attempt to ‘arrest the decline’ of the company.

"We've learnt through the crisis that we can be agile and responsive in the most difficult conditions and put our customers at the heart of our decision making.

"I truly regret that these difficult decisions will have to be made and understand the impact on the colleagues who will leave us. However, the changes we are proposing to make are designed to arrest our decline, allow us to focus on our customers and create a sustainable company," said Centrica CEO Chris O'Shea.

It also blamed tumbling gas prices and a big loss it says it suffered because of the energy price cap.

Around half of the jobs predicted to go will be amongst the company’s leadership, management, and corporate staff with up to half of the senior leadership team expected to go by August.

“A combination of the energy price cap and too little, too late management decisions have left a once proud brand crippled and weak. Slashing thousands more jobs is not the answer. You cannot just cut your way out of a crisis,” said a spokesman for the GMB Union that has vowed to fight to protect jobs at the company.

Growing calls to change the price cap

Centrica and other energy companies have blamed the introduction of Ofgem’s price cap as a big reason for their financial woes.

Centrica before the introduction of the price cap made a profit of £987 million whereas after the cap was introduced reported a loss of £849 million in the last calendar year.

Ofgem, however, has announced that it will not be making changes to the price cap with the regulator recently saying: “The default tariff cap protects customers from being overcharged and ensures they pay a fair price for energy. The default tariff cap allows suppliers headroom to take account of unexpected costs, like a short-term increase in bad debt. We do not have sufficient evidence to justify amending the price cap to reflect increased bad debts for the next six-month cap period starting in October 2020.

In the longer term, if there is a material change in suppliers’ costs as a result of COVID-19 impacts, including bad debt costs, we will consider how to reflect these in the default tariff cap methodology while protecting existing and future domestic default tariff customers.”

Centrica has something of a history with the price cap, as in January 2019 the company launched a legal challenge that argued that it was not calculated fairly. With wholesale energy prices close to record lows the chances of any changes or a rise are unlikely. 

Further Reading

Energy Sector entering a new phase of COVID-19 crisis

Smart Meter Installations resume as lockdown restrictions ease

Ofgem announces £350 million support scheme to help struggling energy suppliers

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