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 at record highs, Russia has all but stopped the supply of gas into Europe in retaliation for sanctions imposed on it, 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 weeks 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 and France 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. For now at least.
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 used to be reviewed twice a year (but was then scheduled to be reviewed every three months) and was set to increase by 80% to £3,549 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.
But with the price cap due to increase again to over £5,000 in January there were calls for the UK government to 'cap the price cap' - with some politicians saying it shouldn't be reviewed in January or allowed go any higher.
Indeed the new Prime Minister Liz Truss, in one of her first major decisions, pledged to cap prices at £2,500 a year (c. €3,000) from October. To put this into perspective the average gas and electricity bill in Ireland is now around €4,200 a year and is likely to go even higher in the months ahead. And in France electricity prices have been capped at 15% for next year (after being capped at 4% this year).
Would a price cap work?
Since the start of 2021 the cost of gas and electricity in Europe has soared largely due to the war in Ukraine.
On average the price increases announced so far in Ireland have added around €2,200 a year to the average household’s energy bills.
However some energy customers are looking at increases in excess of this.
To help shield households from rapidly rising prices, there have been calls for the Irish Government to introduce a price cap in Ireland too.
However Ireland is a huge importer of coal, oil, and gas as we have few natural energy resources. We have no power to cap the price of these fossil fuels as we're buying them from other countries. We have no power to dictate to Britain, Norway or Saudi Arabia etc how much they can charge us unfortunately.
So if we want to cap prices, someone has to pay for the difference between the wholesale or market price of the fuel that we buy and the cap that's been set. And who pays this is the big problem...
In the UK for example, the new price cap will ultimately be paid for by the British taxpayer. The UK government is forecast to borrow a staggering £100bn over just one year to cover the costs. And it could cost more if prices go higher.
This huge level of forecast borrowing (along with big tax cuts) has led to a run on sterling in recent days and talk of a collapse in the currency, which in turn would make imports such as food and clothes (and fuel) more expensive for British consumers.
If something similar were to be implemented here it could cost up to €10bn over one year and would leave the Government with no room for any other type of social welfare measures, public pay increases or tax cuts. It could also lead to an increase in the country's borrowing costs as financial markets take fright at the level of debt we're trying to take on.
In France the Government introduced a price cap by buying i.e. nationalising EDF - its main electricity provider - at a cost of around €12bn. But EDF is now losing money as it's being forced to sell electricity at a loss - meaning the cost to French taxpayers will be much higher and the French State is now left with a huge loss-making business.
Should the Government introduce an energy price cap?
The Irish Government could seek to cap prices.
But ultimately we, the taxpayers, would end up footing the bill as in the UK and France. And as we don't know how high prices might go, it would be like writing a big open-ended cheque.
Another option is to force energy suppliers to sell their gas and electricity at a loss.
If we do the latter, which may prove popular with some of the public, we need to be prepared for major consequences.
Some smaller energy suppliers would go out of business within weeks while the ESB/Electric Ireland, which the State owns, will be straddled with huge debt as it will be forced to sell electricity at a loss. This could leave the company unable to invest in Ireland's electricity grid and increase the chance of blackouts in the future. And the company would likely need a bailout from taxpayers akin to the bank bailouts.
Indeed, the previous price cap in the UK led to around 30 energy suppliers in the UK going bust over the past year, causing thousands of job losses, and leaving over 2 million households having to be moved to a new supplier. The costs of dealing with supplier failures and having to move everyone to a new supplier has cost every UK household around €100 extra on their energy bills.
And, as mentioned, the new price cap is going to cost taxpayers billions and is partly responsible for the recent mini collapse of sterling.
There are no easy answers...
So what else could the Government do?
A few things actually…
How can the Government help households?
1. Reduce energy taxes
The carbon tax now adds over €100 to the average gas bill, with the rate having been increased again in the recent budget.
Meanwhile the PSO levy adds around €60 a year, while VAT adds around €300 to €350 a year based on average usage.
The PSO levy is due to reduce to €0 in October which is welcome. However VAT, which was temporarily reduced to 9% last May, is due to go back to 13.5% at the end of February. It could be reduced further or left at 9% indefinitely.
2. 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 €33 per week and is given to people in receipt of certain social welfare payments.
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 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.
3. Introduce another energy credit
A €200 electricity credit was paid to all households earlier in the year. In the recent Budget it was announced that a bigger credit for €600 will be paid to all households over the coming months to help them get through this winter.
A credit is less financially risky than a price cap as Governments know how much it will cost and it won't put the viability of suppliers at risk by forcing them to sell something at a loss.
However it may need to be increased over the coming months depending on how high prices go.
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 hundreds a year on their bills, which would help offset some of the recent price hikes.
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.