There’s no denying that our household bills are increasing rapidly, from the weekly groceries to electricity and gas, and the news reports are constantly discussing the cost of living crisis. So, why is it happening, and what can we do about it?

Update: Government reforms energy bills help (17 November)

Chancellor Jeremy Hunt announced on 17th November in the 2022 Autumn Statement that The Energy Price Guarantee will be extended from April 2023 until April 2024. As of January 1 2023 – March 31 2023 the price cap is set to rise to £4,279, Ofgem announced on 24 November. However, bill-payers will remain protected under the Energy Price Cap guarantee. 

It’s not until April 2023 that energy bills will increase from the current £2,500 price cap. As of 1 April, the Energy Price Cap Guarantee will increase to £3,000 with cost-of-living payments of £900 to those on means-tested benefits, £300 to pensioners, £150 to those on disability benefits and doubling for those on LPG or heating oil. 

The government will take further steps to address the energy crisis:

  • Scrap green levies – a £150 reduction on annual energy bills
  • The previously-announced £400 energy bills discount will be offered to all households
  • The government will launch a round of new oil and gas licensing, which aims to boost production in the North Sea
  • Negotiate new contracts with renewable and nuclear power companies to lower costs and lengthen agreements
  • Launch a scheme with the Bank of England to help struggling UK energy firms
  • And, finally, there will be a review of the UK’s Net Zero 2050 target, to ensure it’s being met it in “an economically-efficient way”

What is the cost of living crisis?

Cost of Living crisis heat or eat

Many people face the difficult choice of skipping meals to afford to heat their homes in the cost of living crisis. (Image credit: Adobe)

The cost of living is the sum necessary to pay for a household’s basic needs, such as food, healthcare, housing and utilities. When income fails to match the outgoings, it can cause big problems. 

In 2021, what’s become known as the cost of living crisis began to bite, with prices for basic necessities rising faster than the income in the average UK home. According to the Guardian, which looked at data compiled by the Resolution Foundation and National Institute of Economic and Social Research (NIESR), essentials use up more than half of the disposable income of the poorest 20% in the UK. 

When non-essential spending, clothes and transport, for example, is considered, the situation becomes even more severe, with 60% of the poorest families’ total bills exceeding their income. Being forced to cut back, using credit cards and going into arrears has big knock-on effects, but these are the only options available to many people.

Why is the crisis happening?

The causes behind the cost of living crisis are a series of global and local events. The COVID-19 pandemic caused problems with global supply chains. It slowed energy production, while at the same time, the UK leaving Europe led to labour shortages. Add to that Russia’s invasion of Ukraine. This is a factor due to the UK and Europe’s use of Russian oil. 

In retaliation for the sanctions placed upon it, Russia has withheld oil supplies, allowing other countries, such as Saudi Arabia and Finland, to charge a premium price. Given the harsh winter of 2020/2021, many countries, including the UK, depleted their stored oil reserves. The increased demand for energy due to a rapid decline in the use of coal, has outstripped supply and as a result, prices have risen on household goods and gas prices have skyrocketed.

How is the cost of living calculated?

The cost of living is a theoretical index calculated by examining a number of factors. These factors include the price of a representative sample of groceries, clothing, healthcare products, childcare, transport, utilities and the average rent or mortgage in a given area.

How long will the cost of living crisis last?

With inflation still rising, goods and services continue to increase in price. According to the Bank of England, however, they expect this rise to slow down in 2023 and be around 2% in 2024. But even if their predictions are accurate, the prices we pay for things may remain at a high level compared to previous years. 

The tax and audit consultants, RSM suggest that we won’t see the end of the crisis until the latter half of 2023 when household incomes are likely to increase, and inflation drops back.

Why is there an energy crisis?

Energy is measured in therms. One therm is equal to 100,000 British Thermal Units (BTUs), the amount of energy required to heat one pound of water by one degree Fahrenheit. The price of natural gas in January 2021 was approximately 50 pence per therm, but by December 2021, it had soared to around £4.50. 

There isn’t a single cause for this surge, but generally, companies and countries are having to compete to buy gas, of which there is a global shortage after production slowed due to COVID-19 lockdowns, a lack of employees and a long, cold winter which depleted many countries’ reserves. Add to this Russia’s refusal to increase its gas exports to Europe in response to sanctions placed on the country due to the Ukraine invasion. Together, these all result in increased demand and reduced supply. 

Although the crisis revolves around gas, as around 40% of the UK’s electricity comes from the burning of gas at power stations, both have seen price hikes.

What is the energy price cap?

Energy price cap meter reading

The unit price that energy suppliers can charge per kWh is regulated by the energy price cap set by Ofgem. (Image credit: Adobe)

In an attempt to ease the energy crisis, in January 2019, the Office of Gas and Electricity Markets (Ofgem) established a price cap. This is designed to keep customers’ bills down by setting a maximum amount that energy companies can charge. Reviewed every three months, it’s based on the prices charged by gas and electricity producers.

Ofgem’s energy price cap has meant utility companies have had to pay any shortfall between the customers’ prices and the producers. The cap is based on dual fuel users who pay by direct debit and, as such often hits the poorer households hardest, as they frequently use prepayment meters or pay-as-you-go (PAYG) cards, making their energy bills higher generally. 

When it was introduced, the price cap was set at £1,042, but this rapidly increased to £1,971 in April 2022, with the rise showing no signs of slowing down.

As the energy cap is calculated from the prices charged by gas and electricity producers per kilowatt (kWh), it doesn’t cap your total bill, as this depends on how much your household uses.

What is the energy price cap in 2022?

A kilowatt hour (kWh) is the measure of your household’s energy usage per hour, and in April 2022, this was capped at 28.34 pence per kWh, with a standing charge of 45.34 pence per day. The standing charge is the fixed price the utility company charges for supplying your household with gas or electricity, and this is included in the energy cap amount. 

The energy price cap will rise by around 80% from 1 October 2022, to 52p per kWh, meaning the average household bill would have reach an eye-watering £3,549 per year. However, the government have announced a freeze on energy bills, meaning a typical household will pay around £2,500 annually. This freeze will remain in place until 2024, and is a saving of approximately £1,000 on the previously predicted rise. 

How to save energy at home

Energy price cap smart meter

A smart meter can help you understand how much energy you’re using each day and how much it’s costing you. (Image credit: Adobe)

With the rising energy cap, saving gas and electricity at home has become increasingly important. However, there are several things that can be done to prevent bills from becoming more of a headache. 

  1. Turn off any unnecessary lights – saving you approximately £20 a year, turn off any lights you aren’t using. Changing over to LED lightbulbs helps with reducing your energy usage, too.
  2. Switch off instead of standby – by remembering to turn off your electronics at the wall socket instead of leaving them in standby mode, you can save around £55 a year.
  3. Take quicker showers – by reducing your time in the shower, it’s possible to save up to £70 annually, and swap baths for showering for an even bigger saving.
  4. Avoid overfilling the kettle – if you only boil what you need, your annual bill will reduce by around £12.
  5. Only use the washing machine or dishwasher when full – if you wait until you have a full load, you can save around £30 annually.
  6. Turn your heating thermostat down – if you turn your heating down by just one degree, you can save £80 a year. 
  7. Upgrade to energy efficient appliances and electricals – replace inefficient white goods with A+++ appliances and update your old desktop with an energy-saving laptop.
  8. Consider installing solar panels – capture the sun’s energy and convert it to electricity for your home, and you’ll reduce your carbon footprint and save money, too. Any excess energy your panels produce can be sold back to the National Grid, thus reducing your expenditure even further. 
  9. Install a smart meter – if possible, apply for a smart meter. They are generally free to install and allow you to monitor your energy usage per appliance.
  10. Upgrade your old boiler – based on current figures, upgrading your existing boiler to a new energy efficient combi boiler could save you an impressive £350 a year.

Where to get help in the cost of living crisis

If you are struggling as the cost of living increases, there are places you can turn to for help and advice. 

Citizens Advice will advise you on any government benefits you may be entitled to, and they can help you if you are having problems paying rent or mortgage. The UK Government also offers advice on what help is available. It has freed up financial payments for low-income people, and every UK household will have £400 taken off their electricity bill this winter. The Government has brought in these measures to ease the crisis.

What happens if I don't pay my electricity bill?

If you can’t pay your electricity bill several things could happen:

  • Your details could be passed on to a debt collection agency
  • The electricity provider could obtain a warrant to enter your home and install a prepayment meter 
  • If you have a smart meter installed, the provider can switch your meter to prepayment remotely

The cost of any of these actions will be added to your bill, and could affect your ability to get credit in the future. 

It’s essential to contact your electricity provider if you can’t pay your bill. They have to help you work out a solution and negotiate an affordable arrangement. It’s always best to talk to anyone you’re struggling to pay instead of ignoring the problem – it won’t go away unless you speak up. 

If you are struggling to pay your bills, it can have a negative impact on your mental health. There are a number of organisations designed to help you if you feel depressed or anxious. 

The Samaritans have helplines open for support and advice, 24 hours a day, 365 days a year, while Martin Lewis’ Money and Mental Health Policy Institute has a website jampacked with useful suggestions and helpful links. Mind, too, is focused on helping people experiencing poor mental health. 

You don’t need to suffer alone.