More than half of U.K. households risk being pushed into energy poverty this winter by soaring bills that threaten suppliers with rising amounts of debt that simply can’t be repaid.
Consulting firm Baringa Partners says that the financial crisis will have an even greater impact on household finances than 2008’s financial crisis. As bills rise around 80% in October due to the arrival of colder temperatures, this is a dire warning.
The winter energy bill is expected to rise by more than three times what it was a year ago. That will further stretch consumer budgets being hit by a wider cost-of-living crisis that’s stoking fears of a recession and prompting calls for the government to offer more help.
“The impact to society will be higher than the 2008 crash in terms of the impact on households,” said James Cooper, a partner at Baringa. “We’re now moving into territory where a majority of households are placed into debt or a very fragile financial position.”
Average annual energy bills are forecast to exceed £3,500 ($4,140) from Oct. 1, when a new price cap kicks in. That’s more than 11% of a household’s median disposable income, according to the Office of National Statistics.
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Energy costs could eventually drain as much as 17% of household income next year if the government doesn’t give more help, based on price-cap estimates from Cornwall Insight Ltd.
Already, customer debt has been on the rise. People usually repay winter debt in the summer when they consume more energy. As record energy prices hit, this year’s debts increased. As bills rise in colder months, the situation may get worse.
The Don’t Pay UK campaign has drawn over 110,000 signatures from people vowing not to pay their energy bills in protest. Even those who follow through on the threat may only amount to a small fraction of those who can’t afford to pay, particularly if the winter is severe.
It is an enormous challenge to address the crisis. The new prime minister has little chance of changing policy before Liz Truss or Rishi. The energy industry has urged the government to provide more help, beyond the £400 support pledged for each home.
“The big concern we have at the moment is customers’ inability to afford bill rises,” said Dan Alchin, director of regulation at lobby Energy UK. “There’s a need for government to urgently act on that.”
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Helping households by freezing the price cap at the current level for two years would require about £100 billion, according to Keith Anderson, chief executive officer of Scottish Power Ltd., one of the UK’s biggest residential suppliers. Centrica Plc’s British Gas unit will offer grants to some customers to offset their energy debt.
Customers who don’t pay can be put on a repayment meter or even cut off — a lengthy process because suppliers are required to make big efforts to help people pay what they owe. Sometimes companies may not have the ability to deal with bad debts, and they might go out of business.
As the price cap increases next year, this risk is likely to increase. There’s a provision in the way regulator Ofgem calculates the cap to support suppliers dealing with bad debt, which could lead to a higher cap and therefore potentially more household debt down the line.
“There’s a risk people can’t pay or won’t pay and that number could grow quite quickly,” RBC Europe Ltd. analyst John Musk said. “That could have a cascading effect on smaller suppliers that are less well capitalized and they could start going under.”
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