The COVID-19 pandemic hit the United Kingdom hard. The country’s citizens spent nearly all of 2020 under lockdown, a lot of people lost their jobs, and the country’s economy took a significant hit. The annual GDP in the UK dropped to an all-time low when it dropped by 9.9% (Office For National Statistics), and it included all the four major sectors in it. The service sector fell by 8.9%, the agriculture sector fell by 9.4%, production dropped by 8.6%, and the most devastatingly hit sector was the construction sector, with a 12.5% drop.
Many people suffered in the last year, and it looks like the situation is not going to improve for the average UK citizen any time soon. Ofgem has recently announced that they are giving energy companies the green light to increase the energy price in the UK. Ofgem has been known to be a fair regulator of the price point of energy cost as well as an organization that provides greener energy sources.
The price regulation aspect was to make sure that people across the country could have an affordable energy price point so it would be more accessible. The release of the new regulations makes this a difficult objective to achieve.
The energy bill price in the UK is set to increase, and the energy cost will negatively affect millions of families in the country. What is the energy bill going to be like in the future? What are the consequences that the citizens will have to face once the hike is official? Read on to find out.
What does the energy bill hike mean?
This decade has been a tumultuous one, to say the least. The COVID-19 pandemic affected the world negatively, and the repercussions of a global shutdown will be felt for at least a few more years, if not more. There is a strong probability that the rising costs of production and raw materials will lead countries into recession, and the UK might be one of them. The energy price increase might be the catalyst to it all.
So what exactly is the increase in the energy price cap that Ofgem has agreed to?
Let’s take a step back first to understand the entire situation better. Private energy suppliers would hike the energy price preposterously and make it unaffordable for all. Something like electricity, which is necessary like food and shelter, should be accessible to all. This is why Ofgem decided to implement a price cap on energy bills in 2019.
Ofgem made this move to ensure that energy providers did not rip off their customers who did not change their energy bill tariffs every year. On average, before the price cap was released, customers in the UK paid over £1 billion (Financial Times) in excess for their energy bill.
Things sounded good. People still had to stay vigilant in terms of their energy plans, especially for dual usage for both gas and electricity, because there were a lot of service providers out there who could provide better money-saving deals for them. The average was set to help citizens save £75, but savings could go up to £120, and even £250 if they chose wisely.
When the pandemic arrived, the country’s economy took a big hit. The financial toll on the government’s reserve was too steep. As many industries suffered alongside them, Ofgem decided to increase the price cap and thereby increase the energy price to help build back the economy.
Over the last year, from July 2020 to July 2021, the energy prices have increased by £180. In April alone, Ofgem decided to increase the energy price cap by £96 (Ofgem), bringing it to £1,138, which was the pre-pandemic energy price in the UK. They’re announcing a further increase in the energy price cap before their regulated time period. Ofgem reviews the price cap every six months, usually in October and April, and this move is unprecedented.
The energy cost is increasing for the local household and many families that are already struggling to make ends meet with their pay cuts, liabilities, and unemployment. Managing a family with children and increasing costs without any increase in income will probably put them in debt.
All in all, this does not seem like a good option for the citizens of the country. So why is it still happening? What is the reason behind this move?
The reason behind the energy bill hike in the UK
The chief executive at Ofgem claimed that this increase in the energy price cap is fair, and if people just looked for better tariffs, they could end up saving more money than the average amount listed.
The team agrees that the pandemic has been brutal for a lot of households and affected a number of livelihoods but believes that it is fair play because it will help the country’s economy recover and go back to pre-pandemic growth as soon as possible. The plan is to bring the UK GDP back to what it was in 2019, by 2022. This is a steep growth, and it will come with certain price hikes, such as the one in energy cost.
Another reason Ofgem states for why it agreed to increase the energy price cap in the UK is the increasing energy cost in itself. Since the global economy is also trying to recover dramatically at the same pace as the UK , it has led to a shortage of available resources.
There is only ‘x’ number of resources available, and there are x+10 people who want it. This creates a shortage in supply and leads to an increase in prices. As the prices of oil, gas, and fuel rise, countries all over the world are seeing a price hike in fuel and resources like never before.
The United Kingdom is not immune to this shift.
Ofgem and the UK government agree that this increase in energy cost and price cap was the only way they could afford to meet the demand on a global scale.
Read also: Budget Deficit at £394 bn – Impact of Rising Oil Prices on the UK Economy
How does it affect the average UK citizen?
Well, it is not looking too good for the average UK citizen today. The number of people claiming unemployment benefits has more than doubled in the last year since the pandemic hit. In May 2021, 2.5 million (Statista) citizens claimed unemployment benefits in the city. In May 2020, the number was around 1.2 million people.
The rise in the unemployment rate is vastly disproportionate to the current move by the UK government and Ofgem. While more and more people struggle to feed themselves and their families, being able to afford electricity might be just a pipe dream in the near future. The possibility of these people being able to afford to pay their bills without going into debt is becoming less likely every second. Predictions offered by data analytics services claim that nearly 6 million people could go into debt with this energy price hike.
There are many different types of people who will be impacted by this change in energy prices in the UK. As mentioned above, 2.5 million people who are collecting unemployment benefits will fall into this category. They are already having trouble making ends meet, and this energy price increase is going to take a toll on their finances.
There are also people who have had pay cuts over the last year and still haven’t received their original salaries from the pre-pandemic days. This means they’re dipping into their savings or struggling, and a £180 increase in their energy bill will have a significant impact on them.
The third type of people who will find it challenging to adapt to this price cap hike would be the ones who have a prepaid tariff plan. Those who choose the prepayment options for their tariffs have limited options for switching their tariff plans periodically, thereby limiting their options to make the most of the other cost-saving plans available in the market. The service providers also have the right to fine their customers if they do not pay on time and consider them defaulters.
What can be done?
All bets are off at this point, and it feels like the country’s government and Ofgem are leaving each citizen to fend for themselves. There are still chances where people won’t have to pay as much if they keep switching tariffs based on the deals they are getting, which means a lot more effort for fewer savings on average. Also, The UK government has lifted several sanctions leaving its people vulnerable to the ensuing economic ramifications. The worst-hit will be the families who are already struggling to make ends meet.
Hopefully, though, the situation won’t be as dire in the future as it looks right now, and the UK citizens will emerge from this without a recession on their hands.
