This post was updated on 18th April, 2022 with a section added at the end.
The cost of heating our homes, cooking our food, and generally powering the things we use is increasing. It isn’t just increasing in the way we’re used to, though, it’s increasing dramatically – the main driving factor being the wholesale price of gas, which as well as itself being supplied to many homes, is also heavily used in the generation of electricity.
Until last year the way a typical householder in the UK might take for their supply of gas and electricity is to review their supplier annually; make a note of their consumption (or the amount they’ve spent) and punch those numbers into a price comparison service. They will then get a list of suppliers and prices, from which they can decide who might offer the most suitable deal for them for the next twelve months, factoring in how they might want to pay, how they might want to spread the payments, and so on.
What changed last year was that wholesale gas price increase I mentioned. The first signs of trouble for consumers was that, because it went up so much, it started to knock some of the smaller suppliers out of business; they were supplying gas and electricity to customers on annual contracts at prices below that which they were paying.
The general advice for householders became not to bother with the price comparison and switch when their annual contracts came to an end, and to instead remain with their current supplier on their standard tariff – at least until the price cap is reviewed. I will illustrate the reasons for this further down this page.
The review has now happened, and the new cap – applicable from April – has been set, and as everyone expected it marks a significantly higher price for end users than before. With a growing cost of living crisis – not just in this area – the government needed to step in and do something to ease the situation.
I should note that I’m talking about this from the perspective of someone living in the UK. The problem hasn’t just affected this country, and for a comparison with what is being done here it’s worth looking at France’s approach – which as I understand it is to limit the amount by which their state energy company, EDF, can increase their customers’ prices. For a consumer in France, they can therefore expect an increase of something like 4%, which I gather will mean EDF taking a hit to their bottom line of somewhere in the region of £7bn.
The way the gas and electricity supply market works here in the UK means many of the suppliers to end users don’t physically supply either, they’re only supplying it on paper. They buy the necessary quantity from the larger companies and sell it on to their own customers – the physical supply into a home remains the same; the ultimate source of every molecule of gas or each watt of electricity doesn’t change. A forced cap of the nature employed in France, therefore, would have to be applied to the primary sources of supply – putting a hit on their bottom lines. The resellers would be able to pass that on to customers, and wouldn’t take much of a hit themselves, but the larger companies would probably cry foul at the approach (I imagine EDF have in France, to be fair) – but it would get the job done.
The UK government’s approach is instead twofold. One part is a £150 discount to be applied to council tax bills – so every household that qualifies (according to the council tax band they are in) will have their next annual council tax bill reduced by £150, to help offset the rising cost of heating and powering their homes. It’s not going to be anywhere near enough for a lot of people, and there will be edge cases that don’t benefit – but it’s a simple approach, and I’m not going to comment any further on it.
It’s the second part that is interesting.
The second aspect of the UK government’s solution is to apply a £200 ‘discount’ or ‘rebate’ to all domestic electricity bills in October – but the reason I’ve put inverted commas around those two words is because it’s neither a discount nor a rebate. It is going to be recouped over the following five years, by having a £40 charge applied to all domestic electricity bills for five years from the following April – discounts aren’t usually repayable, and a rebate is money back from something you have paid, and also isn’t something that you’d later have to repay.
It’s also not strictly a ‘loan’ (which the repayment point might suggest) because of the way it’s going to work. It will be applied to all electricity bills over the course of five years, regardless of whether or not the person or household whose bill it is benefited from the original £200.
So, to use a simple example, if someone is currently living with their parents in a family home, in October the electricity bill for that home will benefit from the £200. If that person then moves into a separate home – whether a home of their own, or rented – not only will their parents see a £40 charge on their April bill, so will they.
It’s not a repayment, it’s a levy being applied for five years to recoup the national £200 credits.
However, it occurred to me that more is likely to be recovered than initially paid out, because (without knowing any figures) my gut instinct is that the number of households generally increases; we have an increasing population, and I’ve known people who buy houses, convert them into flats, then sell those on. There are also conversions to flats and apartments from other types of building, not to mention new build homes. There will inevitably be some changes that have a negative affect on the number, but it seems to me that the overall trend would be upwards.
Simple logic, therefore, suggests that if the government provides a £200 credit to all households this year, and reclaims that with a £40 levvy on each household for the next five years, an increase in households means more will be collected than paid out.
I did some very quick ‘back of envelope’ maths and commented on Twitter, but I’m using this post to show my workings (after working things out slightly more carefully, because I did make a mistake).
The first value needed to work this out is the number of households – this being the easiest metric to use for the number of electricity bills to which the £200 credit will be applied, and subsequently reclaimed in annual £40 instalments.
The first link I’ve found while typing this is an Office for National Statistics page entitled Families and households in the UK. That seems like a reliable enough source, and it tells me that:
There were an estimated 27.8 million households in the UK in 2020, an increase of 5.9% over the last 10 years.
That’s slightly different wording than I saw previously when I checked on my phone – but the key number is the same. Looking further, I can see that the reason is I was looking at the 2019 equivalent, which says:
The number of households grew by 0.9% since the previous year to 27.8 million in 2019, an increase of 6.8% over the last 10 years.
(There isn’t yet a page for 2021 – but we’re only in January February, 2022.)
The calculation I used earlier was to increase that 2019 figure by 0.7% for each of the three years (a rounded up tenth of the 6.8% given for the ten year increase) to get us to 2022. (Note that the £200 won’t hit bills until October, so it’s reasonable to increase for this year). The mistake I mentioned was that I used 7% instead. Oops.
Correcting that now, and going for a slightly more accurate calculation, I’ll use the 2020 figure, which appears to be unchanged from 2019, and increase it by 0.59% for 2021, and the same for 2022 (that being one tenth of the ten year increase of 5.9%).
27,800,000 households increased twice by 0.59% gives approximately 28,129,000. Let’s call it 28,100,000.
So 28,100,000 households will receive the £200 credit – a total bill to the government (well us, since it’s really our money) of £5.62bn.
From the following April, and for five years, the £40 levy will appear on all those bills. If the number of households doesn’t change, over the course of five years the same amount would be recouped as paid out. As noted above, the actual people paying that levy may not necessarily be the ones who received the £200 – but that’s a different issue.
The number of households is likely to increase – so if we increase it using the same calculation as above, 0.59% per year, this is how it looks:
- In 2023 (year one of the ‘repayment’) the number of homes has increased from 28,100,000 to 28,265,790 – let’s call it 28,260,000. At £40 per bill, £1.13bn is collected.
- In 2024 (year two of the ‘repayment’) the number of homes has increased from 28,265,000 to 28,431,763 – let’s call it 28,430,000. At £40 per bill, £1.137bn is collected.
- In 2025 (year three of the ‘repayment’) the number of homes has increased from 28,430,000 to 28,597,737 – I’ve rounded down previously, but I think it’s reasonable to round that up, so let’s call it 28,600,000. At £40 per bill, £1.144bn is collected.
- In 2026 (year four of the ‘repayment’) the number of homes has increased from 28,600,000 to 28,768,740 – let’s call that 28,770,000. At £40 per bill, just over £1.15bn is collected.
- Finally, in 2026 (year five of the ‘repayment’) the number of homes has increased from 28,770,000 to 28,939,743 – or, say, 28,940,000. At £40 per bill, over £1.157bn is collected.
£1.13bn + £1.137bn + £1.144bn + £1.15bn + £1.157bn totals up as £5.718bn.
That’s £98,000,000 more recouped than paid out.
Note: This isn’t a criticism of the government for that – there are much worse things for which they can be criticised; this was more of an exercise for myself, to see if my initial feeling was correct when looking at actual numbers, and based on the sources I’ve used, it is. However, in the overall scheme of things, that’s not a particularly huge sum of money – especially not when the government has wasted billions on their dubious track and trace scheme etc. To be fair, the £150 credit on council tax bills will more than wipe out that £98m, so overall there’s no gain – but if a common complaint I’m seeing about this approach is that they aren’t doing enough, this shows that in a way they aren’t even doing as much as they at first seem to be. They’re also banking on the prices not rising significantly again next year, or the year after, which might leave people worrying about the additional £40 repayments added to their bills.
Price comparisons and the price cap
I mentioned this above and said I’d return to it, to illustrate why the advice has been to stick with current suppliers on their standard tariff, rather than change.
The problem is that because of the prices, until the new price cap is applied, the unit prices on new contracts is likely to be even higher still than people are paying on standard tariffs.
Despite my advice being to do nothing at the moment, I was asked to do a price comparison. The household in question was previously on an annual contract with a supplier that has (finally) been taken down by the wholesale prices, and have been transferred to a new supplier – the transfer has just completed.
Their contract tariff looked like this (all figures rounded to the nearest penny):
- Gas unit price: £0.03
- Gas daily standing charge: £0.21
- Electricity unit price: £0.15
- Electricity daily standing charge: £0.21 (as per the gas)
After the transfer, their tariff was (and is):
- Gas unit price: £0.042
- Gas daily standing charge: £0.26
- Electricity unit price: £0.22
- Electricity daily standing charge: £0.26
When I did the price comparison, the two cheapest options were:
- Gas unit price: £0.09 or £0.09 (a fraction of a penny different)
- Gas daily standing charge: £0.21 or £0.27
- Electricity unit price: £0.34 or £0.32
- Electricity daily standing charge: £0.51 or £0.48
I suggested going back to my original advice; stick with the current tariff; it’s more expensive than the previous contract, but those new ones are much higher, and when the new cap is revealed it might not be that high. It came out a few days later, and looks like this:
- Gas unit price: £0.07
- Gas daily standing charge: £0.27
- Electricity unit price: £0.28
- Electricity daily standing charge: £0.45
The unit charges under the new cap are lower than both the comparison prices, as is the standing charge for the electricity. Only the gas standing charge compares favourably, with one being the same (when rounded), and one cheaper.
My updated suggestion, therefore, was to stick to with the current tariff, and it might pay to look again as we get closer to April, when the new capped prices will commence. (In this case, it’s particularly worthwhile keeping an eye on things, because the electricity usage is notably high.)
My own case is slightly different. I’ve actually managed to avoid the problem to some extent. I only have an electricity supply into the flat, and benefit from (gas) communal heating. I do still have to pay towards the heating, and therefore it will be affected, but due to the way it’s managed the impact isn’t quite as bad as it could be; I usually pay more than I use via a fixed amount paid along with my rent, and get the difference repaid late in the year for the preceding April-March period.
For electricity, my supplier went under just after I switched to them last January. I was transferred to another, and after a few months got myself a two year fix – just as prices looked like they were going to go mad. I just managed to beat the crisis, opting for the two year fix in favour of a couple of marginally cheaper one year fixes.
Good decision – although, when the contract does come to an end in 2023, I can almost certainly expect a sharp increase.
Update: 2022-04-18
And an update on the update: My guess in the text below about Rick’s billing situation is completely wrong. I have left what I originally wrote as an update preserved in the rest of this post, though. It turns out that as yet I don’t understand what’s going on with his rate and his price increase.
I received an email from Rick Murray yesterday pointing out that his electricity charges had increased by more than the 4% mentioned for France, where he lives, which he also touched on in one of his own blog posts. The actual increase he points to in that post, from €0,1013 per kWh to €0,1374, is over 35%.
Here, the amount the price cap has increased may not be the same as the amount people’s unit charges (i.e. the standing charge and the price per kWh) have increased because there may be other factors; they may have come out of a fixed price contract that was below the previous cap just as the new cap kicked in, for example, or if they were on a company’s standard tariff, it may be that it was lower than the previous cap, but now they’re being charged at the cap. Without knowing the full situation in France – how their supplies (and suppliers) are set up, I don’t know if there is a similar explanation in this case. So I did a little browsing, and amongst the things I found, I think the simplest explanation can be found on this site – not least because it’s in English, so I didn’t need to do any dodgy web translations.
I can ignore the prix de l’abonnement (which translates as ‘subscription price’ and is the equivalent to a standing charge in the UK), because Rick was talking about the charge per kWh – the usage charge. According to that page it seems that in France there are multiple suppliers, and the price someone pays per kWh does depend on the supplier and the offered price – so in that sense, it works in a similar way to the UK. There are two types of tariffs; regulated and competitive – and as soon as I read that I assumed the ‘regulated’ tariffs are the equivalent to being on a standard variable tariff in the UK (i.e. subject to the cap) and the ‘competitive’ ones are the equivalent to being on a cheaper, fixed price contract.
Reading further on the same page it appears that is indeed the case – but by my reading it’s slightly differently arranged to how it is here. The regulated tariffs – aka Tarif Bleu (Blue Tariff) – are only enforced for EDF (as noted above) and another company called Engie. (Taking only a slight glance at those two, I think EDF deal with electricity, and Engie with gas.) The competitive ones tend to be offered by most suppliers (which I would assume includes those two), and which will include a lower subscription price, and/or (so it could be one but not the other) usage price.
The most astounding thing, though, is the suggestion that most people in France stick to the ‘regulated’ tariffs for two reasons; firstly, that it’s ‘safe’ because of the scare word – ‘regulated’ – and secondly, because many don’t realise there’s a choice!
Clicking through to look at the actual Tarif Bleu rates for EDF, they appear to be €0.1740 per kWh – considerably higher than the prices Rick mentioned, so I would guess he is on a competitive tariff from another supplier. If so, that’ll be why his prices can increase by more than 4% – but importantly, still be way below that regulated tariff.