News broke today that energy prices may be set to rise by another 78% in October. This comes off the back of a 54% price rise in April and represents a 174% price increase in the space of 6 months. A rise of this size is unprecedented and is far worse than originally predicted. Every single person in the country should be up in arms about this.
Allowing consumers and businesses to be scalped is an abject failure in regulation. A near threefold increase in energy prices will have major repercussions on the economy. Allowing this to happen is tantamount to economic vandalism.
Rising energy prices affect everything
Every business and every household in the UK is completely reliant on energy suppliers. When energy prices go up, everyone pays for it. Worse, they have a captive audience. “Turning off” is not an option and competition is essentially meaningless when all providers are charging the absolute maximum. The result of this is that everyone has to swallow the cost. That has two troubling economic effects.
First, businesses feel the pinch with virtually every aspect of their operation getting more expensive. From manufacturing through retail to service industries, there are very few sectors that will not be faced with rising costs. This is massively inflationary, bad news when inflation is already sky high.
Second, household finances are squeezed ever tighter. Combined with rising prices, this compounds the cost of living crisis and will likely have a knock on impact on consumer confidence. This will lead to falling latent demand in the economy, with sectors like leisure being particularly hard hit. Reductions in consumer spending will follow which further depresses GDP growth. Whilst this in itself would be deflationary, it will be nowhere near enough to counter the inflation we are seeing today. In all likelihood, this will lead to companies going bust, contracting supply and further fueling inflation.
It is quite possible this will lead to a recession. Once again, the UK is the sick man of Europe.
The effect on households will be even worse
All of this is terrible news for households. Not only will this make the cost of living crisis significantly worse, but it will also put jobs at risk. If the situation is not turned around soon, millions will be thrust into poverty with a choice between eating and heating.
But it gets worse, as the energy companies have thought of everything. Not content with raising prices at 20x the rate of inflation, they have also increased standing charges. This means that even if you forego gas and electricity, you will still pay through the nose.
Standing charges, which let’s remember are completely unaffected by energy markets, have already risen by 81%. As it stands today, you will pay roughly £130 a year before you even turn on a light switch. It’s not clear what October’s price rises will do to this, but I would expect this to rise even higher. This cost is particularly punitive for single person households. How on earth can this be justified? The only answer is that the market has failed.
What else can be done to curb energy prices?
When markets fail, government needs to take action. They cannot simply allow a critical industry to unleash havoc on the economy. In 2008, failure in the banking industry caused worldwide economic damage. In 2023, the energy industry could well do the same if action is not taken now. But what can government do?
To answer that we must first consider; why are Ofgem allowing prices to rise? Put simply, they are afraid that certain segments of the energy sector will go under if they do not. This is because of a profit disparity between energy producers and energy suppliers. Increased energy usage, coupled with supply disruption, have meant that wholesale prices have risen substantially. The result is that whilst some parts of the sector are experiencing record shattering profits, others are posting enormous losses.
Solving this is not easy but lessons can be learned from the Banking crisis. Like the banking sector, energy companies are responsible for critical infrastructure. Chaos in the industry will translate into chaos in the economy. Therefore it is not enough for regulation to simply “ensure that the industry does not fail”. Regulation must also ensure stability.
One way of dealing with this would be to create similar capital measures for energy suppliers. This would act to reduce sensitivity to global supply shocks. A second measure would be to implement stress testing. This would ensure that energy companies are able to withstand short term pricing disparities. A final measure would be to create an industry bail out fund, with a levy on profits from both energy producers and suppliers. This would act as a safety net, without scalping consumers.
Unlike Sunak’s strategy of allowing rampant price rises (compounded by cash hand outs), these measures would prevent inflation. Sadly, our government is economically illiterate.