Mmore than half of UK households risk being pushed into energy poverty this winter due to a surge in bills that threatens suppliers with mounting amounts of debt that simply cannot be paid.
The crisis could have a bigger impact on households than the 2008 financial crisis, according to consultancy Baringa Partners. The grim warning comes as bills are expected to rise by around 80% from October, just as the onset of colder weather increases energy demand.
Winter energy bills are expected to more than triple from last year. That will further stretch consumer budgets, which are being hit by a wider cost-of-living crisis that is fueling recession fears and prompting the government to offer more help.
“The impact on society will be greater than the 2008 crash in terms of the impact on households,” said James Cooper, partner at Baringa. “We are now moving into territory where the majority of households are in debt or in very fragile financial condition.”
Average annual energy bills are forecast to top £3,500 ($4,140) from October 1, when a new price cap comes into effect. This is more than 11% of the average household’s disposable income, according to the Office for National Statistics.
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Energy costs could end up draining up to 17% of household incomes next year if the government doesn’t provide more help, based on price cap forecasts from Cornwall Insight Ltd.
Customer indebtedness is already rising. In the summer, people usually pay off debts accumulated in the winter when they use more energy. But debt actually increased this summer as energy prices hit records. The situation can get much worse as bills soar in the colder months.
The Do not pay UK the campaign collected over 110,000 signatures from people pledging not to pay their energy bills in protest. Even those who follow through on the threat may be only a small fraction of those who cannot afford to pay, especially if the winter is severe.
Dealing with the crisis is a big challenge for the next prime minister, with little chance of new policy until Liz Truss or Rishi Sunak take office. The energy industry has called on the government to provide more help beyond the £400 support promised for each home.
“The big concern we have at the moment is the inability of customers to afford bill increases,” said Dan Alchin, director of regulation at lobby Energy UK. “There is an urgent need for the government to act on this.”
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Helping households by freezing the price cap at the current level for two years would require about £100 billion, according to Keith Anderson, chief executive of Scottish Power Ltd., one of the UK’s largest residential providers. Centrica Plc’s British Gas division will offer grants to some customers to offset their energy debt.
Customers who don’t pay can be put on a repayment meter or even cut off – a lengthy process as providers are required to go to great lengths to help people pay what they owe. Some companies may simply be unable to cope with the level of bad debt, causing them to go out of business.
This risk will increase as the price cap is raised as early as next year. There is a provision in the way regulator Ofgem calculates the ceiling to help providers dealing with bad debts, which could lead to a higher ceiling and therefore potentially more household debt in the future.
“There’s a risk that people can’t pay or won’t pay, and that number could grow quite quickly,” said RBC Europe Ltd analyst John Musk. “This could have a cascading effect on the smaller suppliers who are less capitalized and they could start going bankrupt.”
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