The 150% Energy-Price Shock Waiting for the Next UK Leader

© Reuters. The 150% Energy-Price Shock Waiting for the Next UK Leader

(Bloomberg) -- This is the first story in a six-part series on the political and economic landscape facing Britain's new prime minister.

Every UK prime minister expects to face challenges. Few would imagine that they might have to spend billions of pounds to make sure people don’t freeze in their homes during winter.

That’s the dramatic situation Boris Johnson’s successor, either Liz Truss or Rishi Sunak, will face as soon as they take over in September. Energy bills are set to soar weeks later when a price cap is raised by more than 60%, taking the increase this year to about 150%.

For many, it will be too much to handle, leaving them unable to power, or heat, their homes. According to charity National Energy Action, one in three households — more than 8 million — are expected to be pushed into fuel poverty.

The energy issue is driving a broader cost-of-living crisis in the UK, where petrol and food prices are also surging, and overall inflation is heading for double digits. The government has already announced £37 billion in aid for households, but the worsening squeeze will put pressure on the new prime minister to do more. Both candidates say tackling inflation is a priority, though they have vastly different economic policies; Sunak wants fiscal prudence and Truss has promised large-scale tax cuts.

“This is going to be one of the first issues on the the agenda and I would hope in the coming weeks the candidates push quite hard on what they are really going to do in the autumn,” said Josh Buckland, a partner at energy consultant Flint Global and a former government adviser. “Pricing pressures are continuing to go up and inflation is starting to bite.”

The cost-of-living crisis is just one of the major challenges facing the next prime minister. Over the coming days, Bloomberg News will look at growing pay pressure in the public sector, the crisis facing the National Health Service, the costs of Brexit, and what happened to Johnson's election promise to “level up” deprived parts of the country.

Despite a busy inbox, there’s a particular urgency to the inflation challenge given the October pressure point. The energy-price cap is forecast to leap to a record £3,285 that month, according to Investec Bank Plc. It will rise again in January, to about £3,360 pounds. Energy consultancy Cornwall Insight Ltd. sees a similar increase.

The adjustment is based on wholesale costs, which have surged after Russia limited gas flows to Europe in retaliation for sanctions applied after the war on Ukraine. While the UK gets relatively little gas directly from Russia, the market is connected to Europe by three huge pipelines, creating a price link between the regions.

In May, government support for energy bills was doubled to £400 for every household starting in October, but spiking wholesale prices mean the support doesn’t match the scale of the problem.

If households can’t pay their bills, that’s also going to affect energy suppliers. Volatile wholesale prices are already making it more difficult for companies, and more than two dozen have gone bust in the past year.

“The stark reality is that customers will be unable to pay,” said Gemma Berwick, a senior consultant at BFY Group. “Bad debts will inevitably increase over the winter.”

Read More:

• The Pound’s Woes Run Deep, Whether It’s Truss or Sunak in No. 10
• UK Inflation at New 40-Year High Worsens Living Standards Crisis
• Truss vs. Sunak: Where UK Leadership Contenders Stand on Economy

The new prime minister may also come under pressure for action in other areas, such as reducing taxes on petrol. While the average UK price has eased a little since the start of the month, it’s still up about 30% this year. Cutting green levies, which are added onto bills to pay for renewable energy policies, has been raised as a possible tool to bring down costs.

The surge in energy costs also has broader implications for the economy. It’s eating into consumer income and hurting demand, raising concern the UK could be tipped into recession. Real wages are falling and retail sales have declined for a six of the past eight months.

And energy market developments aren’t offering much hope that the squeeze will ease any time soon. Forward prices for this winter are above 400 pence a therm, more than quadruple the five-year average. Costs are expected to stay elevated until 2025-26 throughout Europe, according to ABN Ambro Bank NV.

That means throwing money at the crisis now will just be a sticking plaster, and the government will still have to come up with more in-depth changes. It set out options last week for an overhaul of the electricity market to reduce the influence of soaring gas prices and cut costs for consumers. Measures won’t be rolled out until late 2023 at the earliest.

“This winter will still be truly brutal for millions,” said Peter Smith, policy director at NEA, which estimates an average of 9,700 deaths each year are caused by cold homes. “As well as potentially needing further government action this winter, with prices likely to stay high for the foreseeable future, longer-term solutions are also needed.”

©2022 Bloomberg L.P.