Rapidly rising energy prices are set to put a huge financial strain on households this winter and there have been calls on the Government to introduce an energy price cap. But what is an energy price cap and would it work?
To say that these are unprecedented times in the energy market would be an understatement.
Gas and electricity prices are soaring to record highs, Russia is being accused of disrupting the supply of gas into Europe for political gain, and there are genuine concerns about possible power outages this winter for the first time in decades.
And as we head into the darker months when our gas and electricity bills usually soar, there have been widespread calls in recent days for the Government to step in and help households with rapidly rising prices.
One proposed solution has been a cap on energy prices, similar to what exists in the UK right now.
But would it work and is there anything else that could be done instead?
What is an energy price cap?
As the name suggests, an energy price cap puts a limit or cap on the amount an energy supplier can charge its customers for gas and electricity.
There is no energy price cap in Ireland. Suppliers here are free to charge as much - or as little - for their energy as they like.
In the UK, however, the energy regulator Ofgem introduced an energy price cap in 2019 to help protect households from excessively high prices and to ensure people who didn’t switch supplier regularly weren’t charged an excessive ‘loyalty premium’.
The cap is reviewed twice a year and it’s due to increase by 12% from 1 October following the most recent review.
The UK price cap puts a limit on the unit price of gas and electricity. It is not a cap on a household’s total bill, which will depend on how much energy has been consumed.
The price cap also only applies to the most expensive tariffs - customers in the UK are still free to shop around for cheaper deals. Indeed, up until recently, the energy price cap was about £200 higher than the cheapest deal on the market, meaning for many households the cap was irrelevant as they were on cheaper tariffs.
Why is there talk of a price cap?
Since the start of the year the cost of gas and electricity in Europe has soared.
Ireland hasn’t been immune and some suppliers here have raised prices four times this year alone.
On average the price increases announced so far will add around €400 to €500 a year to the average household’s energy bills.
However some energy customers are looking at increases of €700 a year or more.
To help shield households from rapidly rising prices, there have been calls for the Irish Government to follow the UK example and introduce a price cap in Ireland too.
However the price cap is proving controversial in the UK right now, where prices have skyrocketed too, and suppliers there are calling for it to be scrapped. They say the current cap no longer reflects the true cost of energy and is causing them to lose money.
Indeed, nine energy suppliers in the UK have gone bust over the past few weeks, causing hundreds of job losses, and leaving over 1.5 million households looking for a new supplier.
Experts say dozens more suppliers are likely to fall before the winter is out. This would leave millions more households scrambling to find a new energy supplier and potentially lead to thousands of job losses.
Should the Government introduce an energy price cap?
Introducing an energy price cap is just one way to protect households from rising bills.
However it feels like a blunt instrument, which could lead to unintended consequences.
Is it fair to force a company to sell something at a loss? Particularly if there's a genuine chance it'll put its business at risk?
It’s also important to remember that the UK price cap was introduced before the current crisis. It wasn’t introduced as a response to the current problems.
And, as mentioned earlier, the price cap is now causing big issues in the UK with calls for it to be scrapped entirely.
So what else could the Government do?
A few things actually…
How can the Government help households?
1. Reduce energy taxes
Each year the carbon tax adds around €80 to the average gas bill, with this set to increase again in next month’s budget.
Meanwhile the PSO levy adds around €60 a year, while VAT adds around €300 to €400.
It’s not an insignificant sum.
The Spanish government reduced VAT on energy bills significantly in July and the Irish Government could do the same.
2. Provide an energy tax credit
The 2022 Budget will take place on 13 October. The Government could use it to announce an energy tax credit for households.
A tax credit reduces the amount of tax you pay by the size of the credit and is worth the same amount to everyone so it could be considered a fair and equitable way to help households.
3. Increase welfare payments
The Government helps households with energy bills through two main social welfare measures: The winter fuel allowance and the free electricity allowance.
The fuel allowance is currently €28 per week and is given to people in receipt of certain social welfare payments. This year it will run from 27 September for 28 weeks
The free electricity allowance is a €35 monthly supplement paid by the Department of Social Protection to help people with their electricity bills. All over 70s and people under 70 who meet certain criteria are eligible to receive the payment, which is part of the Household Benefits Package.
Both of these payments could be increased in the upcoming budget to help struggling households. However it would only help people inside the social welfare net and pensioners. Many hard-pressed, middle-class taxpayers would get nothing unless one or both of the previous measures were also included.
What can I do to lower my energy bills?
In the meantime, if you’re worried about rising energy prices there are two things you can do to help offset the price hikes: switch supplier and reduce your consumption.
Switch supplier - the quick fix!
The quickest and easiest way to save money on your energy bills is to switch supplier. That's because most suppliers offer substantial discounts to new customers who move to them, and these discounts last for the duration of your contract, making for some significant savings!
At the moment, someone who switches could save over €500 a year on their bills, which would help offset most of the recent price hikes. And with 14 energy suppliers nationwide, there’s plenty of choice for those looking to switch.
Comparing and switching suppliers is super easy and free and only takes a few minutes on bonkers.ie.
However, before making the switch, take a look at these 7 important things to consider when switching energy suppliers and check out the most common questions we get asked about the energy switching process here.
Reduce your energy consumption
After switching supplier, the second easiest way to lower your energy bills is to try to reduce your usage. This needn’t be a huge effort or hassle, as there are lots of small everyday changes you can make around the home that will make a decent impact without leaving you sitting in a freezing cold room with the lights off.
Here are 15 of our favourite tips to help you lower your electricity consumption and here’s our top tips for heating your home for less - some might surprise you!
Get in touch with us
Do you think introducing an energy price cap is a good idea or are the consequences too risky? We’d love to hear your thoughts in the comments below!
And if you have any energy-related questions, we’d be happy to help.