You are here

Crisis in energy market plays into perfect storm for consumers

by Kate Morrison, CAS Fair Markets team.

This column was published in the Herald on 22 September 2021.

Earlier this week Citizens Advice Scotland released analysis of polling by YouGov that suggests over 1.4 million people in Scotland have run out of money before payday at least once in the past year.

People are struggling. And that’s before furlough ends and Universal Credit is cut by £20 over the next two weeks.

Pretty soon, the weather will turn cold and we’ll all move to turn the heating on, or turn the thermostat up a little higher.

But this week we saw extraordinary changes in the energy market. Some suppliers have gone to the wall, while others are seeking government support. We’re even seeing proposals for the government to back a ‘bad bank’ to take on debts that won’t be recovered, bringing to mind Northern Rock at the height of the global financial crisis.  

Many households were already set to struggle with the cost of energy this winter and news of suppliers suddenly exiting the market will be a worry for many consumers.

So firstly, some advice: if your energy supplier goes out of business – don't panic. The supply of gas and electricity to your home is protected by Ofgem’s safety net, and the industry regulator will appoint a replacement supplier for you.

It’s advisable not to switch supplier whilst this process is happening, but it’s a good idea to take a meter reading if you can.

If you have a credit balance on your account, this too should be protected. If you have a pre-payment meter, the failed supplier should help you to top up until the new supplier takes over, and the new supplier should then contact you and take the required actions to ensure you can continue to stay on supply. If you’re struggling to top up, our network stands ready to help.

It’s also important to note that the full impact of the rising cost of gas hasn’tfed through directly to household energy bills yet. The energy price cap provides short-term protection for around 10 million households on default gas and electricity tariffs and a further 4 million households with pre-payment meters. Consumers on fixed-rate deals will also be yet to see the current wholesale prices feed through to bills.

In August, Ofgem announced a significant increase in the level of the price cap from 1 October. The reasons it gave hinted at the crisis we are now seeing across the market. Namely, the rising cost of wholesale gas.

Despite the price cap increase meaning higher bills, it was welcome to hear the Secretary of State reiterate his commitment to the cap in the House of Commons earlier this week. It is still very much in the consumer interest to have a cap, as without it suppliers could increase bills by even higher amounts. When we last saw a wholesale price spike in 2008, gas bills increased by more than a third. With so many households already struggling with the cost of living, a return to such extreme price rises would only makes things worse.

With some smaller suppliers unlikely to be able to ride through the current turbulence, we’d also call for the government to ensure that no one loses out on the lifeline Warm Home Discount if their supplier goes out of business this winter. While neither of these measures are perfect, they do offer consumers a degree of protection.

And it is protection which is sorely needed because, for the first time in recent memory, official advice from the UK Government on saving money in the energy market does not involve switching supplier. With so few fixed rate deals available, some price comparison sites have suspended their services.

Even standard variable tariffs, which are subject to the price cap, will be loss-making for suppliers given current market conditions. The result is a serious cash-flow problem and it is this that is the principle reason why so many suppliers are struggling to survive.

So, how do we fix this, beyond the emergency measures of the coming weeks? There can’t be a Herald reader out there who is unaware about COP 26 in Glasgow next month. The answer again is to reduce our dependency on fossil fuels and move towards renewable energy and low-carbon heating, as it is our continued dependence on fossil gas for heating and power generation that has left our energy market so exposed to the recent extremes in prices.

Looking beyond the current crisis, we need both the UK and Scottish Government to consider longer-term questions about how our energy system works, how it is paid for, and how we as individuals, businesses and communities can be supported to become part of the solution. 

The current situation is yet another reason why we need a just transition to net zero carbon emissions - because when we rely too heavily on volatile fossil fuels, consumers will lose out.

This transition will not be simple however. It’ll be the largest, most complex infrastructure project the country will have undertaken in living memory, and will require far higher levels of engagement and understanding from consumers themselves. As I’ve written here before, our own research suggests that people generally support the principles of net zero but are unsure about what it means for their own lives, and worried what it might mean for their own bills.

But it needs to happen. Not just because the future of the planet literally depends on it, but because in Scotland household finances are currently facing a perfect storm, with one in four already in fuel poverty, energy bills set to rise further and incomes under growing pressure. A just, green recovery offers the chance to genuinely ‘build back better’.