The Next Energy Catastrophe

The energy price cap is due to rise by a further £830 this October, just as the next cold snap hits. This will plunge millions into poverty and worse – but the government shows no intention of stopping it.

What is currently scheduled in early October is a catastrophic increase in the energy price cap that will coincide with the seasonal increase in demand for energy as the cold winter months close in. (Marina113 / Getty Images)

This year is set to be one of the very worst on record for living standards. Rising prices, rising debts, and low wage growth are combining to hammer working people in this country. No serious economic forecaster expects anything other than a remorseless squeeze on living standards for the rest of the year—and beyond—with inflation reaching levels not seen since the 1980s and the price of essentials like wheat and oil continuing to soar.

Yet the government and, sadly, the Opposition appear to be unable to grasp the true scale of what is heading our way. It took the unlikely figure of Kevin Anderson, chief executive of Scottish Power, in a Select Committee hearing earlier this week to deliver a few home truths to Parliament. The cost of living crisis is already biting, Anderson warned the committee in his evidence, but ‘by October’ it will become ‘horrific’.

The timing is critical. Households in Britain, who have already suffered a £693 average increase in their energy bills, are facing a pincer movement in autumn from two separate factors. First, household demand for energy in Britain drops as we approach summer, as the warm weather means less need to heat homes, typically with gas. This seasonal decline in demand will help disguise the true impact of price rises—while prices may have risen 50% or more, if the amount being bought falls (as is usual) by about 50%, the hit to family budgets will be much reduced over the summer months.

But as Anderson points out, what is currently scheduled in early October is a catastrophic increase in the energy price cap that will coincide with the seasonal increase in demand for energy as the cold winter months close in. Households will be hit by a terrible double-whammy: a rapid increase in prices at precisely the point where they need to spend more. Those on pre-paid meters, typically the poorest, will feel the effects most quickly, in October, while the majority of customers Anderson expects to be hit in December or January, as new, higher bills come due.

The government’s own forecasters, the Office for Budget Responsibility, let slip that they expect the price cap rise to be a shocking £830—more than, and on top of, the nearly £700 the cap was raised by in April. By the end of the year, the average household could be paying £1,500 more for their gas and electricity than at the start of the year—an enormous squeeze for almost everyone, but devastating for those families already struggling. As a result of rising prices and inadequate government support, the Resolution Foundation estimates that 1.3 million people will be forced into absolute poverty next year.

Throw in the continued, expected increases in prices for most goods, and rapidly rising household debt, and the situation looks grim. The IMF’s latest World Economic Outlook highlighted the rise in lower-income household debt in the UK as among the worst in the developed world. That debt is appearing in many different forms: credit card debt has risen to record highs, even as retail sales are actually falling, suggesting many people are turning to short-term loans to try and keep up with price rises. Kevin Anderson reported to Parliament that 10% of Scottish Power customers are already late in payment, up 125,000 from this time last year to 716,000.

Caught between rapid price rises, growing demands for debt repayments, and wages and salaries that do not grow nearly as quickly either, most households—not only the poorest—look set for a rough autumn and winter this year, especially if interest rates also go up again.

Of course, better-off households with higher incomes and some savings to fall back on will be somewhat insulated from the worst of it. But the political point here is that inflation, plus debt, plus low wage growth creates a common, class-wide experience. This is a different dynamic to austerity, which was initially implemented through divide-and-rule: pick out some minorities to attack first—those in council houses with a spare bedroom, for example—before moving on to the rest.

Austerity was devastating, but (at least initially) selectively applied. When it began to bite across the population, it became and more unpopular until, eventually, the government had to abandon the programme. And some groups were deliberately somewhat protected throughout, for example through the ‘Triple Lock’ for pensions—an essential support for pensioners, but cynically used by Conservative-led governments to insulate a key group of their voters from the worst of austerity cuts.

The cost of living crisis is different. Pretty well everyone has to heat their house, so everyone has to pay more for this. Same goes for buying food and, to a large extent (certainly where public transport is inadequate outside of London and urban areas), to pay for fuel in their car. This creates a different kind of politics around higher inflation than to austerity: because pretty much everyone is affected, the potential constituency for demands to regulate prices is very broad. (The Tories have already tried to exploit this common problem, cutting fuel taxes in the Spring Statement to try and curry favour.)

Historically, the working class in Britain has responded to rapid price rises by turning to unions and collective bargaining. This was highly effective the last time inflation was persistently high, in the late 1960s through to the late 1980s. Inflation, for example, averaged 12% in the 1970s, but pay rises averaged 15%—meaning that living standards, as shown by pay, improved far more back then than they have done in the last fifteen years.

But after the anti-union offensive of the 1980s, trade unions are shadow of their former selves. From over half of all employees in a union in 1979, only 23% are now members—and most of them are in the public sector, with private sector union levels at just 12%. This situation may finally be changing: union membership has been rising since 2017, and the number of strikes is at their highest level for five years. The disruption caused by Covid-19 has given fresh impetus to union organising in different industries. But the movement won’t recover overnight, and the cost living crisis is hurting people now.

A different approach is needed. We should be looking to build unions wherever we can, but there has to be an immediate, political response to the crisis. This means that the issue of inflation has to be politicised. We should not allow the government to claim, as it has tried to, that inflation is simply the result of forces beyond its control, like the war in Ukraine. Martin Lewis did the movement a great service by pointing this out.

Prices are not some natural phenomenon. Alongside money, they are how the society we live in decides to allocate its resources. If we want resources to be allocated differently, we can decide to change those prices. Typically, we let a market decide how to do this, with prices varying according to the ebb and flow of demand and supply, but this isn’t obligatory.

Controlling prices can be challenging, because the price of any one good or service is typically connected to many others—those selling it have to buy the raw materials needed to make it, for example. Or, as we are seeing, companies insist on making very substantial profits. They may even exploit rapid price rises to make super-profits, as the oil and gas companies are now doing.

But if we are prepared to squeeze profits, there can be a good case for controlling a price. For household energy prices, the mechanism to do this is already there, in the form of the energy price cap, introduced (under pressure from Labour) by Theresa May in 2018. Ofgem determines the level of the cap, setting a maximum that domestic prices can rise by.

Ofgem is a government agency; if it wanted to, it could set a zero increase in the price. It doesn’t do that because it claims it must protect privatised companies, allowing them to sell higher-priced gas at a profit. But this is a political choice, not an economic necessity: we could choose to protect households instead of company profits. (Gas and electricity suppliers, overall, are the most profitable in the entire British economy.) And if some gas suppliers go bust as a result, they can be swiftly nationalised, just as Bulb Energy was last October.

We have been given a clear target: the gas price cap. Demand number one of the movement against price hikes and profiteering should be to freeze the cap in October. Let gas suppliers, and the government borrowing, take the strain. Demand number two is massive investment in home insulation and the renewable energy. There is a mass movement waiting to be built.