Will rising energy costs hit the economy?
Five leading business groups have said that rising energy bills would slow down economic recovery from Covid-19, as both businesses and individuals will struggle financially. The group have asked the government to take steps against the rising bills to reduce a “significant and far-reaching” impact on the UK economy.
This comes as a result of the energy price cap, which limits the rates an energy supplier can charge for gas and electricity. The price cap is forecasted to rise more than 50%, to around £2,000, when the regulator Ofgem reviews in on February 7, and implements the changes on April 1.
The increase in the number of people falling into fuel poverty is estimated to treble, and businesses will be hit with higher operating costs.
Leaders of the British Chambers of Commerce, Institute of Directors, Make UK, Federation of Small Businesses and Confederation of British Industry have all signed a letter to Chancellor of the Exchequer Rishi Sunak, urging for decisive action.
“We are writing to ask you to act urgently and decisively to support consumers with spiralling bills and help business manage inflated costs over the medium term.
“In doing so the Government can set the conditions for a more resilient and competitive energy system that can underpin the UK’s transition to net zero in the years ahead.”
The cap is set to add around one to two percent to the rate of inflation, the business groups have said, which currently sits at a 30-year high at 5.4%.
The business groups have emphasized that this is a medium-term crisis, and not a short-term seasonal one.
It added: “By acting now, Government and business can mitigate against the economic impacts that high wholesale energy prices for a sustained period will have.
“Failure to do so could see years of higher bills, rising inflation and further increases to business costs.”
A Government spokesperson said: “We understand the pressures people are facing with the cost of living and are providing support worth around £12 billion over two years to help families.
“Support is being targeted towards the lowest paid, and we are specifically helping households with their energy bills.
“In addition, the energy price cap is currently insulating millions of consumers from high global gas prices and we’ll continue to listen to consumers and businesses on how to manage the costs of energy.”
In recent news, Together Energy became the latest energy supplier to go bust due to the ongoing energy crisis, bringing the total number to 26 in the last 12 months.
What is being done?
Soaring energy bills have sparked a lotof discussion about what should be done to protect individuals financially. Ofgem, the government, and the energy industry have narrowed several options down to the three most impactful:
- Spreading the costs over several years
- Removing VAT and environmental levies from energy bills
- Extending the warm home discount to more customers
Although all three are important, the most impactful of the three is to spread the costs over several years, as this is the one big enough to make a true difference to all customers.
By spreading the costs of the sudden price hike on 1 April across several years, it would make the price rise much smaller and reduce the financial strain on individuals. Also, with the benefit of time, the gradual rises will coincide with falling wholesale prices, making the effective increase much smaller.
The option to remove VAT and environmental levies, as well as expending the warm home discount, would also be very helpful for both domestic and business energyy users. Removing environmental levies and VAT alone could save a typical home around £220 a year and expanding the warm home discount will directly help those who are most vulnerable.
Right now, the warm home discount is being funded by a social levy that is applied to all energy bills. This means that increasing support for eligible customers will cause larger increases for everyone else.
Overall, the combination of all three options would be the best approach to go with. But to remove any added complexity, it is largely decided to go ahead with spreading the costs over several years for now.
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