Energy prices and their effect on households

With two thirds (66%) of adults in Britain reporting their cost of living increased in the past month, rising energy prices are a growing factor in the squeeze on household budgets.

Of those who reported a rising cost of living to the Opinions and Lifestyle Survey (OPN) in January 2022, 79% cited higher gas and electricity bills as a cause. 

Fuel costs rose considerably last October following a 12% rise in the Office of Gas and Electricity Markets (Ofgem) energy price cap, which limits the amount suppliers can charge customers on default energy tariffs.

The energy regulator is due to review the price cap again this month, and prices could rise even further when it is implemented in April.

Energy price rises are likely to hit lower income households disproportionately, as they spend a higher proportion of their income on utility bills and are more likely to be in fuel poverty.

The wholesale price of gas (system average price) in January 2022 was almost four times higher than in early 2021, with large rises since summer 2021.

According to National Grid data, the seven-day average price reached highs of 12.8p per kilowatt hour in December 2021, more than eight times higher than the same period the previous year (1.5p).

It has since fallen back to around 6.5p, with daily prices remaining volatile over recent weeks. 

Energy suppliers can buy gas and electricity at a pre-agreed price (such as forwards and futures contracts), to help reduce the impact of day-to-day market volatility.

As the global economy restarts after pandemic-related lockdowns, limited stocks of natural gas and supply constraints have driven prices higher.

The UK imports around 50% of its gas from the international market, and most homes in England and Wales are heated by mains gas supply. 

Gas is also used to fuel around a third of the UK’s electricity generation, so rising gas prices have in turn led to rising electricity prices. 

Some households were sheltered from these rises over the winter because of the Ofgem price cap. 

The cap places a limit on prices for customers on default tariffs to "keep prices fair" and protect them from market volatility. It is reviewed every six months.

Since the summer of 2021, 25 energy suppliers have gone out of business and one entered special administration, mainly because of substantial rises in wholesale energy prices.

In response Ofgem are consulting on new proposals to ensure the cap reflects the “costs, risks and uncertainties facing energy suppliers”. 

After the energy price cap rose in October 2021, consumer prices for gas and electricity rose by 17.1% and 8.7% respectively. 

Currently 12-month inflation rates for gas and electricity are at their highest level since early 2009, with gas at 28.1% and electricity at 18.8%. 

Gas and electricity price movements are closely tied to the Ofgem price cap 

Default tariff cap level for dual fuel, £ and index prices for gas and electricity, monthly, Jan 2015 to Dec 2021  

Data for default tariff cap level and index prices for gas and electricity, Jan 2015 to Dec 2021 (XLSX, 14KB)

The 12-month inflation rates for gas and electricity are closely tied to changes in the energy price cap, moving in lockstep with the rates set by Ofgem. 

Before the introduction of the price cap in January 2019, fluctuations in the inflation rates of gas and electricity were smaller and more frequent.

The rising cost of energy bills is not an isolated issue for household budgets. 

Inflation is rising across many areas of life, with the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rising by 4.8% in the 12 months to December 2021.

Household services, including utilities, were the largest contributor to the inflation rate of 4.8%

Contributions to the CPIH 12-month inflation rate, UK, December 2019 to December 2021

Data for contributions to the CPIH 12-month inflation rate, UK, Dec 2019 to Dec 2021 (XLSX, 12KB)

The largest upward contribution came from housing and household services (1.31 percentage points, of which 0.59 percentage points came from electricity, gas and other fuels).

With increasing pressure on budgets, two thirds (66%) of respondents to the latest Opinions and Lifestyle Survey (OPN) in January said their cost of living had gone up in the last month. 

Of those, almost 9 in 10 (87%) said the price of their food shop had increased, and 8 in 10 (79%) said gas and electricity prices were a factor. 

As a result, almost a third (32%) of those who said their cost of living had risen are cutting back on their use of fuel such as gas or electricity. More than half (53%) said they were spending less on non-essentials, and around a quarter (26%) using their savings.

The impact of COVID-19 is also being felt in various ways, with 14% of adults reporting their household finances had been affected in the previous seven days according to the latest OPN (6 January to 16 January 2022).

Of those who said they were working from home at least once in the previous week because of the COVID-19 pandemic, more than four in five adults (82%) said they were spending more on utility bills, when interviewed by the OPN in November 2021.

This cost is likely to be offset among homeworkers, whose spending overall is more likely to have fallen because of the pandemic.

Nearly half (49%) of people who worked from home at least once in the previous week (OPN, 3 to 14 November) said their spending has reduced because of homeworking since the start of the pandemic, while just 14% said their spending had risen.

While rising energy prices will affect most households across the country, they are more likely to disproportionately affect those on the lowest incomes.

In the financial year ending in 2020, the poorest 10% of households spent more than half (54%) of their average weekly expenditure (£298.90) on essentials such as housing (including electricity and gas), food and transport.

Those in the richest 10%, in comparison, spend 42% of their average weekly spend of £1,073.20 on the same essentials. 

Spending on gas and electricity is also higher as a proportion of disposable income for those in the poorest 10% of households (7%) compared to those in the richest 10% of households (2%).

As a result, an increase in energy prices disproportionately impacts low-income households. 

Widespread reliance on gas as an energy source will mean few households are immune from rising bills. 

A majority of homes across England (86.3%) used gas central heating as their main heating source in 2019, according to the English Housing Survey.

However, homes with poor fuel efficiency will be hit hardest by energy price rises. 

According to the English Housing Survey, fewer than half (46%) of homes in England in 2020 had a Standard Assessment Procedure (SAP) rating of C of higher.

The SAP is a measure showing the energy performance of a home and is used to produce Energy Performance Certificates (EPCs).

For those with lower SAP ratings, energy bills can be considerably higher. 

Average (median) fuel costs for a home in England with a D rating are 21% higher than those with an A-C rating (£1,279 compared with £1,057). 

This rises to more than double (£2,226) for a property with an F rating and around three times higher (£3,071) with an G rating. 

According to the Department for Business, Energy and Industrial Strategy (BEIS) Annual Fuel Poverty Statistics,13.4% of households in England (3.18 million) were classed as fuel poor in 2019, a reduction of 1.6 percentage points (341,000 households) from 2018. 

These are defined as households with an energy efficiency rating of D or below, and whose disposable income would be below the poverty line after housing and fuel costs are taken into account. 

More than a quarter (25.7%) of households were classed as having a low income in 2019 (with 74.3% having a high income) and 57.4% of households were classed as low energy efficiency. 

Of those households with low incomes, 52.2% were classed as fuel poor.

Targeted support is available for some households for are unable to afford the cost of their energy bills through the Warm Home Discount, Winter Fuel Payments and energy efficiency schemes.