From bad to worse — how will people cope with even higher energy prices next year?

Millions of people are already starting to feel the pinch after the energy price cap rose by almost £140/year for the average dual fuel customer on October 1st. But it could be set to get much worse. Analysts are forecasting that the price cap could rise by a staggering £400/year to £1,660, for an average household, next April.

This could leave many falling into debt with their supplier, unable to afford to top up their meter and potentially facing the grim choice between heating and eating. Earlier this year the government published proposals to improve the Warm Home Discount scheme, but it should now urgently reassess these, and use the budget to put in place extra support from next April when price rises hit.

Price hikes will swallow up Warm Home Discount

Warm Home Discount is one of the schemes designed to support people with their energy bills — currently a £140 rebate for low income pensioners and households most at risk of fuel poverty. But our new analysis shows that despite planned improvements to the scheme, significant price hikes early next year will leave many people who get Warm Home Discount hundreds of pounds worse off, even if prices fall rapidly next year.

We’ve found a household covered by the price cap, with average energy use and getting Warm Home Discount will likely be £193 worse off between April 2022-March 2023 compared to the same period in 2021–2022. Households who had shopped around for a good fixed deal last year face an even bigger rise of £330.

These are fairly conservative estimates and if energy prices fall more slowly, people on the price cap could be as much as £310 worse off, rising to £440 for people rolling off a good deal.¹

The worst affected households will be those that lose access to Warm Home Discount under the government’s proposed changes to scheme eligibility. While the changes will see almost 800,000 more households getting the rebate overall, some who currently get it will lose access. Disabled people are disproportionately likely to be among the group who lose the Warm Home Discount.

The combination of price rises and loss of the discount will see their overall costs rise by a massive £340 compared to the year before. This is based on average consumption, although we know some disabilities mean people face higher energy costs than other households.

There’s still time to review Warm Home Discount

If significant price hikes kick in as expected next year, the level of support under Warm Home Discount, even with a small proposed increase to £150, won’t be enough to achieve the scheme’s aim of tackling fuel poverty. The Government should urgently look at options available to help people through the Warm Home Discount scheme, and propose changes in time for next year. We think three main changes should be considered:

• An increase in the level of the rebate to reduce the impact of price rises on recipients next year. The level should be based on the most up to date government modelling of future price rises.
• An expansion in the number of households who receive Warm Home Discount, to make sure more households at risk of fuel poverty are supported next year.
• An increase to the part of the scheme that allows energy companies to provide extra financial assistance to people they identify in need of support. More money in this fund could support the hardest hit households who will lose access to the scheme under the reforms.

These one-off changes would help reduce the risk of households not being able to heat their homes properly. They would also mean small bill increases for other customers, although these would be low relative to the wider changes in prices.

More support will be needed this winter

We know people are already struggling with the impact of higher prices for energy and other essentials — particularly the 6m households who have also had their Universal Credit cut.

Right now the price cap is providing consumers with protection from the worst effects of rising wholesale energy prices and there is some support in place over the winter.

• Winter Fuel Allowance tops up incomes for households with people of pensionable age by up to £300, and Cold Weather Payments kick in to provide a top up to benefits if very cold weather hits.
• The government has also announced a temporary £500m Household Support Fund for winter, which will be distributed by Local Authorities in England to families in financial emergencies.

Even with the price cap and existing support, it’s vital we monitor the situation this winter very closely. We’re already hearing from our frontline advisers that people are struggling. The government should be poised to offer more short term support if people’s circumstances get worse in the coming months. And the forthcoming budget must include proposals on how people on lower incomes will be supported more generally as energy prices continue to rise next year.

[1] Analysis is based on Cornwall Insight’s projection of the April 2022 price cap (£1,660 a year for typical dual fuel usage paying by Direct Debit). Our lower price scenario is based on the price cap then falling back to its current level (£1,277) from October 2022. Our higher price scenario is based on the price cap falling back by half its previous increase (to £1,468.50). The annual bill across the April 2022-March 2023 period is estimated based on Ofgem data showing the average annual dual fuel household paying by Direct Debit accrues 39% of their energy bill in summer (April to September) and 61% in winter (October to March).