Household energy bills in Britain to soar 80%

For months, a tsunami of high energy costs has borne down on Europe. On Friday, the first big waves crashed ashore in Britain, with the news that household gas and electricity bills will nearly double in October.

The announcement, by Britain’s energy regulator, raised the specter of a humanitarian crisis in one of the world’s richest countries: Millions of Britons might not be able to afford to heat or light their homes this winter, unless the government steps in on an enormous scale to cushion them from the vagaries of the market.

It also rattled British politics in the final days of a hard-fought campaign to replace Prime Minister Boris Johnson. The country seems strikingly unprepared for a crisis foretold ever since Russia jolted global energy markets by cutting back the flow of natural gas to Germany and other European countries.

In a country where rising prices have become numbingly familiar at gasoline stations and grocery stores, the sheer magnitude of the increase left many slack-jawed: A typical British household would pay 3,549 pounds (about $4,200) over a year for electricity and natural gas, up from the current 1,971 pounds.

“It is an economic war,” said David Howell, a former Conservative energy minister. When a new government takes power in September, he said, it will have to come up with 20 billion to 30 billion pounds to aid as many as 15 million vulnerable households. “This is hanging over the new prime minister,” Howell said.

The fallout from Russia’s gas cutbacks – which came in retaliation against the West for imposing sanctions after its troops invaded Ukraine – will cascade across the continent, raising the cost of the war in different ways in different countries, depending on how much they rely on Russian energy.

But with leaders from London to Berlin mounting costly state interventions, it augurs a reversal of decades of liberalization in energy markets.

France has capped gas and electricity rates, subsidized the cost of gasoline and diesel fuel, and spent 45 billion euros ($45 billion) to help hard-hit families. Germany has moved to take command of its energy markets, subsidizing new liquefied gas import terminals and bailing out one of the largest utilities, Uniper, when it ran into financial trouble after Russian energy giant Gazprom broke gas supply contracts.

In Britain, where gas accounts for roughly 40% of electricity generation but has a disproportionate effect on its cost, the price jump announced Friday follows a 54% rise in April. It will affect about 24 million households.

“This will be devastating for many families,” Jonathan Brearley, CEO of the regulatory agency, Ofgem, told the BBC. “The difficult news I have to give today is that prices look like they are continuing to rise.”

The higher household energy prices come on top of hefty increases in food and fuel prices. Greg Jackson, CEO of a renewable energy company, Octopus Energy, has pointed out that if the price of beer had risen as much as that of natural gas over the past year, a pint of beer in a pub would cost 25 pounds, or about $30.

“How can you adapt to a rise like this?” said Tewdos Gebreysus, 35, an Uber driver in London, who said he was now paying four times as much on his energy bills as he was in the beginning of the year.

With two young children, Gebreysus said he was beginning to worry about how he would keep them warm when the weather gets colder. To make ends meet, he has begun driving longer hours and is juggling a second job. “I don’t know whether to cry or scream,” he said with a sigh.

Nikkie Blackwell, 52, who lives on government assistance in south London, said she would cut back the use of her washing machine and choose microwave-ready meals to try to bring down her energy bills. But she said she feared that the monthly bill would be more than what she gets in welfare benefits.

“No one wants to help,” Blackwell said.

The news of the price increases came during a moment of deep political drift in Britain, with Johnson preparing to leave office and his Conservative Party preoccupied by the contest to replace him. Johnson has left it for his successor to craft a response to the skyrocketing energy costs.

The front-runner to replace him, Liz Truss, has promised targeted aid to help those hardest hit by higher bills, although she has steadfastly refused to detail her plans. She and her opponent, Rishi Sunak, reject more sweeping measures, such as using state subsidies to freeze the energy price cap for two years.

“I know how hard it is for millions of Britons, and how grave concerns are about the consequences of today’s decision by Ofgem on the next energy price cap,” said Truss, writing in the Daily Mail on Friday. “The rest of Europe is facing the same challenge, which will loom large as winter sets in.”

But at a campaign gathering with Sunak on Thursday, she said that the solution to the crisis was not to throw more money carelessly at consumers. Sunak, who has proposed cutting the value-added tax on energy bills, warned that without drastic action, “there’s a high risk that millions of people will fall into destitution.”

Britain is far less dependent on Russian gas than Germany or other European countries. But the structure of its energy market makes it extremely sensitive to fluctuations in the market price of natural gas.

It has also suffered worse inflation than other major European countries. Consumer prices rose 10.1% last month from a year earlier, the fastest pace in 40 years, squeezing household budgets. The Bank of England has predicted that inflation would peak at 13% in October as the new energy prices turn up in household bills. Other estimates are higher; analysts at Citibank have said the rate could reach as high as 18% early next year.

“The pressure on stretched households will only intensify, and the calls for support will get ever louder,” Martin Young, a utility analyst at Investec, a financial services firm, wrote in a recent note to clients. Young expects another jump, to 4,210 pounds, in January.

The price increases, and how to deal with them, have become a hot subject of political discourse in Britain and across Europe. The British government has offered a package that includes 400 pounds per household to help residents with soaring bills, but politicians, consumer advocates and energy executives now say that more forceful intervention is needed to cushion households from the surge in energy costs.

Britain’s opposition Labour Party recently proposed to freeze energy tariffs where they are now, paying part of the 29 billion pound cost by increasing the so-called windfall taxes that the Conservative government imposed this year on oil and gas giants operating in the North Sea.

The main component in Ofgem’s calculations was a more than doubling of wholesale electricity and natural gas costs. These account for about 70% of the new price cap. Coping with increases of such magnitude is beyond the scope of Ofgem, whose role is to protect consumers from profiteering by suppliers, Brearley said.

“What I am clear about is, the prime minister with his or her ministerial team will need to act urgently and decisively to address this,” Brearley said. “The outlook for the winter without any action looks very difficult indeed.”

The leadership contest has been dominated by Truss’ promise to cut taxes, which is popular with the rank-and-file Conservative Party members who will vote for the next prime minister. But economists say it will do little to protect the most vulnerable people from the ravages of soaring energy bills.

With another hefty price increase looming in October, the public outcry over energy costs is likely to haunt the next prime minister. Unless the government develops an effective response, some analysts said, the issue could cripple the government and tilt the next election to the Labour Party.

The peculiar nature of Britain’s price cap system, analysts said, also amplifies the sticker shock from rising increases.

“We have a sort of worst-of-both-worlds system,” said Jonathan Portes, a professor of economics and public policy at Kings College London. “Household prices are related to the spot market, and we sort of save up price increases and dump them on households all at once.”

Beyond the mechanics of the system, critics said Britain had lagged Germany and other European countries in urging people to reduce energy consumption and increase the efficiency of their homes and offices.

Germany, for example, has offered people a monthly 9 euro ticket on public transportation to encourage them not to use their cars. The program has succeeded in decreasing car trips by an estimated 10% and could encourage more people to get off the roads if a long-term plan for such tickets was introduced.

“This is the poverty of our politics,” said Tom Burke, chair of E3G, an environmental think tank, and a former government adviser. “You’ve got to do some financial work to address the costs in the short term, and then you’ve got to really drive forward on demand reduction in the long run.”