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Energy bills are falling – but the UK is still not protected from future price shocks

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Blog Energy bills are falling — but the UK is still not protected from future price shocks A lower Ofgem price cap shouldn't lead to complacency - fuel poverty is still a huge problem in the UK By Paulo Yunda 23 May 2024 Tomorrow, Ofgem will announce the new energy price cap for July-September 2024. This announcement will significantly impact households’ finances and their energy consumption. While the cost of energy is expected to fall, energy prices remain one of the main drivers of inflation. Despite inflation dropping to 2.3%, polling

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Energy bills are falling — but the UK is still not protected from future price shocks

A lower Ofgem price cap shouldn't lead to complacency - fuel poverty is still a huge problem in the UK


Tomorrow, Ofgem will announce the new energy price cap for July-September 2024. This announcement will significantly impact households’ finances and their energy consumption. While the cost of energy is expected to fall, energy prices remain one of the main drivers of inflation. Despite inflation dropping to 2.3%, polling released this week found that 86% of people in the UK agree that the cost of living crisis is not over.

Since the peak of January 2023, the energy price cap has come down to £1690 a year for an average household that uses both electricity and gas. While this is a drop from highs of £4273 it is still 32% higher than the before the energy crisis began. Higher energy bills have also increased the depth of fuel poverty by 67% between 2020 and 2023, meaning that households require a larger reduction in energy costs to escape fuel poverty.

Some households were able to temper to impact of sky-high energy bills by reducing their energy usage – but when we look at the data, we can see this wasn’t consistent across the country.

Figure 1: Household electricity consumption dropped around the UK, with variation between areas

Except for a few local authorities with no data available, electricity consumption fell in all local authorities between 2019 and 2022 (figure 1). Demand fell between 4 and 15%, with no immediate observable patterns within and between countries and devolved regions.

We found that several local authorities have experienced a significant decrease in electricity consumption, ranging from 12 to 15%. These include Cannock Chase, Fareham, Havant, Rotherham, and Redditch. Despite these declines, fuel poverty levels vary substantially across these areas, from 7% to 15% — compared to the 2022 English national average of 13.4%.

Reduction in gas consumption in some local authorities was considerable, ranging from 15 to 18% between 2019 and 2022 (figure 2). Gas demand, controlled through thermostats, is far more flexible than electricity, where consumption cannot easily be curtailed. There are fewer energy-saving actions households can take to reduce electricity consumption, which could explain why gas consumption decreased more significantly than electricity consumption during this period.

Figure 2: Household gas consumption dropped across the UK, with variation between areas

Previous studies conducted in the UK have indicated that for every 1% increase in the price of gas, demand for it could decrease by between 0.1% and 0.28%. This suggests that our observed decrease in gas consumption aligns with expected behaviour in response to rising energy costs. Our analysis shows that the demand for gas fell by 0.34% for every 1% increase between 2019 and 2022.

Some households will have cut their energy consumption by reducing excessive energy use – things like installing draught proofing or no longer overheating their home. Other households may have been forced to cut their energy use in ways which harmed their comfort and health – for example, not turning the heating on even on freezing winter nights. Looking at the data, it is difficult to differentiate between the two.

It is likely that areas where the largest cuts in demand were made, households would have experienced a very tough couple of winters.

The decline in energy consumption has not offset the increase in the depth of fuel poverty. This is a stark reminder of the urgent need to make our homes more energy efficient, so we can reduce energy bills.

In the last decade, the UK has made remarkable strides in transitioning its electricity generation to renewable sources. The share of electricity generated from renewables has surged from 7.7% in 2010 to 43.4% in 2020. However, while renewable energy adoption has flourished, efforts to address the UK’s leaky housing stock have faltered. The installation of insulation, crucial for improving energy efficiency and reducing energy bills, has collapsed by 95% between 2012 and 2019. If we had spent the last decade insulating our draughty homes, the harmful impacts of sky-high energy bills could have been alleviated. A Great Homes Upgrade, using public investment and a national retrofit taskforce, would upgrade our homes to EPC C by 2030 – so they stay warmer and don’t rely on expensive fossil fuels.

The energy crisis has also underscored the weaknesses of how our energy retail market works. At NEF, we have been calling for a National Energy Guarantee, a new energy safety net that guarantees every household, regardless of means, an amount of essential energy for free or at heavily subsidised rates. If a household uses an excessive amount of, the cost of energy gets higher, encouraging the wealthiest households who consume the most to install energy-saving measures.

A Great Homes Upgrade combined with a National Energy Guarantee can offer a comprehensive approach to mitigating the impacts of expensive energy bills on households across the country. The energy price cap may be falling, but the cost of living crisis is still with us. The UK is still vulnerable to future energy crises and needs to start planning for them with policies which make us more resilient and secure.

Image: iStock

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