Some 24 million British households received distressing news on Friday: Starting October 1, they will be paying 80 per cent more for energy, or a total of 3,549 pounds (about $4,200) over the course of a year for a typical British home.
The amount of the increase was set by a government regulator called Ofgem (for Office of Gas and Electricity Markets). Its job is to figure out how much cost companies that supply energy to households can pass along to consumers, while ensuring that the companies play fair.
Ofgem determines what suppliers can charge households through a complex calculation that includes setting a price per unit of natural gas and electricity, as well as a series of other charges, like subsidies for clean energy and networking and operating costs, that make up a bill.
Although widely described as a price cap, the figure released by Ofgem is an estimate of what a typical household would pay over a year. A bill may exceed or fall short of the estimate depending on how much energy a household used, as well as its location and other factors. The cap used to be updated every six months, but starting in October it will be reset every three months.
Ofgem said the increase announced on Friday was nearly entirely due to higher wholesale energy costs, largely stemming from Russia’s invasion of Ukraine. In a typical bill starting in October, wholesale energy costs will represent about 70 per cent of the total.
The suppliers are permitted to make a 1.9 per cent profit under the pricing programme. Ofgem called such profit levels “modest” on Friday, although it is looking into whether they are too high. The regulator noted that “most domestic suppliers are currently not making a profit.” Energy, though, is currently a tale of haves and have-nots. Producers of oil and gas like BP and Shell have reported record profits, while consumers and some businesses are taking a beating. Dozens of small startup utilities have gone bust in Britain, but generators of electricity with largely fixed costs, like nuclear plants and wind and solar farms, are most likely “doing well” from the high prices, said Martin Young, an analyst at Investec, an investment bank.
Announcements like those on Friday of sudden, huge surges in prices have led some commentators to say the regulator and the price caps are not functioning. “The price cap doesn’t work,” said David Howell, a former British energy minister who is now a member of the House of Lords.
As things stand, the reality is that energy prices must be either paid by consumers or somehow subsidised by taxpayers for those who can’t afford them. — The New York Time
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