Economic Watch: British households feel squeeze amid soaring energy prices

15 Jan 2022 06:56am
For illustration purpose
For illustration purpose

LONDON, UNITED KINGDOM -- Soaring gas prices have sent shock waves through the British economy over the past months, putting up inflation and causing a cost-of-living crisis.

As changes in the wholesale prices are forced upon consumers, households and low-income ones in particular are feeling the budget crunch for something as crucial as energy.

While prices are expected to fall back after the winter, with its impact moderating then, pressure is mounting for the government to seek solutions as soon as possible and bail out poor families.

Experts said fundamentally it is about the country's energy independence, since it relies heavily on imports and has met setbacks when pushing on with renewables.


Though having fallen from the record highs seen in the days leading up to Christmas due to warm weather and increased supply, natural gas prices in Britain remained buoyed these days -- still about three times the level one year ago -- by continuing supply-demand gaps facing the country.

While countries across Europe scrambled to tackle the surge in energy prices, Britain was among the most vulnerable to the spike as it imports about half of its gas, according to a government report.

Consumers were then affected, since around 85 percent of British homes have gas central heating, the BBC reported. And gas is also used to generate a third of the country's electricity, whose prices therefore went up too.
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For Britain, transition to green energy failed to come to the aid but instead added to the gravity of the problem this time. While the share of wind and solar are growing in the country's electricity supply, "recent months have not seen the usual levels of wind, which have increased dependence on other, costlier, energy sources," said Michael Tamvakis, a professor at London-based Bayes Business School.

"Britain's growing reliance on renewables, such as offshore wind and solar, does not solve the problem of intermittency -- what happens when the wind does not blow or the sun does not shine," reported The Guardian on Monday.

With these disadvantages, the crisis is feared to go on. Since August, more than 20 energy suppliers have gone bust in Britain. The energy market "suggests that high gas prices will be here for the next 18 months to two years," Chris O'Shea, chief executive of British Gas owner Centrica, has told the BBC.


Amid the crisis, the fallout has rippled across the British economy. Nearly 80 percent of small businesses in the country said costs are rising, and fuel is among the primary causes of the increase, according to a survey conducted by the Federation of Small Businesses, a British business organization, in early January.

British households have felt the squeeze as well. During the fourth quarter of 2021, they saw their financial wellbeing deteriorate at the fastest rate since the second quarter of 2020, as surging living costs hit people's pockets and led to the steepest fall in cash availability since the start of 2014, according to the latest Scottish Widows Household Finance Index on Wednesday.

In response to the soaring wholesale gas and power prices, the energy price cap, which is set by the country's energy regulator, governs most retail energy bills and covers as many as millions of households, is expected to rise to almost 2,000 pounds (2,743 U.S. dollars) in April on current estimates from 1,277 pounds (1,751 dollars), which, The Financial Times said in an editorial on Sunday, is "roughly equivalent to the hit from a recession."

This would hit low-income families the hardest. If the government fails to cushion the blow, the number of British households living in fuel poverty, which is measured by a combination of energy efficiency, household income and energy prices, could also climb to the highest on record by this spring, according to the National Energy Action, a fuel poverty charity.

Though the cap increase is huge for households of all incomes, said the Resolution Foundation, an independent think-tank, in a December report, it "will be felt most acutely by poorer families: households in the bottom income decile will see their energy spend rise from 8.5 to 12 percent of their total household budget -- three times the proportion for those in the top decile."


Days ago when one of Britain's biggest energy supplier Ovo Energy reportedly advised its customers to have a cuddle and eat bowls of porridge to save on their heating bills this winter, the company immediately came under fire. It, furthermore, hinted at how limited the ways are to bring down the prices.

Discussions about cutting the 5-percent value added tax (VAT) rate on energy bills are ongoing. The Labour Party has called for it, but British Prime Minister Boris Johnson, also leader of the Conservative Party, dismissed the option as "a blunt instrument" earlier this month.

"The difficulty is that you end up also cutting fuel bills for a lot of people who perhaps don't need the support in quite the direct way that we need to give it," he said. For reasons like individuals might seek to exploit the VAT reliefs and the boundary between what is eligible for relief and what is not becomes legally contentious, in the past ministers have also been reluctant to introduce new reliefs, according to a government report.

Another option on the table is expanding the Warm Home Discount Scheme, which currently entitles those in danger of falling into poverty to a one-off discount of 140 pounds (about 192 dollars) on their electricity bill for winter 2021 to 2022. The government is reportedly considering it, though controversy remains that the scheme is presently funded through higher bills on other customers.

Others in the toolbox that the government is mulling over include providing loans for energy companies so that they can help consumers and a windfall tax on North Sea oil and gas producers, which have enjoyed a bonanza due to surging gas prices.

Looking ahead, experts are envisioning a future for Britain with greater independence.

"The long-term answer is better insulated homes, more renewable energy and infrastructure that allows us to take advantage of it even when the wind isn't blowing," said Torsten Bell, chief executive at the Resolution Foundation, earlier this month. - Xinhua