Natural Gas Prices Are Tearing Britain's Price Caps And Subsidies Apart

As Britain navigates a drastically changing energy landscape in the wake of the COVID-19 non-pandemic and the ensuing lunatic lockdowns imposed around the world, that Britain’s poor are facing the greatest challenges is becoming increasingly apparent, with the number of British households spending at least a third of their income on energy bills projected to double by next April.

The vast majority of households in some vulnerable groups – including some 70% of pensioners – will be spending a tenth or more of their income on fuel from April, when support for energy costs will be reduced.

However, the number of households paying 30% or more of their income on fuel will double from April, from 1.6m now to 3.8m. The number of households paying a fifth of their income on fuel is projected to rise from 3m to 7.5m. Overall, two-thirds of British households will be spending 10% or more of their income on fuel within the next six months.

By any metric, a doubling of households paying at least a third of their income on energy bills within the next six months is not merely an inflationary shock, but arguably an hyperinflationary one. Yet that is the state of the UK economy according to some analyses and projections.

The doubling of households in that dire circumstance is primarily the result of the government’s pulling back its energy price guarantee program after next April, a decision made by UK Chancellor Jeremy Hunt in an effort to restore some semblance of credibility to the government budget after the epic disaster of former Prime Minister Liz Truss’ “mini-budget”.

Even more significantly, in an attempt to claw back spending as well as boosting revenue, the chancellor also announced that the government’s scheme to cap energy prices for two years, costing about £80bn, would be universal only up to April, being targeted after that at poorer households.

“This is a landmark policy supporting millions of people through a difficult winter and today I want to confirm that the support we are providing between now and April next year will not change,” he said.

While the program changes are understandably driven by a need to at least show some budget and fiscal discipline, a number of British economists and policy wonks, including former Prime Minister Gordon Brown, have argued forcefully that the data indicates that budget and fiscal discipline is being paid by Britain’s poor.

The figures have been produced by York University’s social policy unit for a pamphlet written by former prime minister Gordon Brown, who warned that the “scale of the increase is staggering”, and that a “black hole in provision” remained.

He called on prime minister Rishi Sunak and chancellor Jeremy Hunt to raise more funds from people with non-domicile tax status and banks to fund more support for those in need.

“People are worse off and 2023 is going to be worse than 2022,” Brown told the Observer. “People are going through these winter months, I’m afraid, knowing that things are going to get worse after April. You’ve got to provide a level of help with heating that is higher than it is at the moment.

“Why didn’t the government do anything about non-domiciles? Why didn’t they do anything about bankers’ bonuses? Why didn’t they do anything about the City generally? Clearly, there is a huge amount of inequality between the position of those privileged people and the people who are suffering.”

However, another uncomfortable dimension of the situation is that the increasing volatility in natural gas prices is wreaking havoc with the budgeted costs of the energy price guarantee program.

Near the end of October, the year on year change in UK natural gas prices were on some days even negative—prices in 2022 were actually lower than on the same day in 2021.

Barely a month on, however, the year on year price change for natural gas in the UK exceeds 36%.

Nor should any of this volatility be allowed to obscure the economic reality that UK natural gas prices have increased by several multiples compared to prices from 2020.

As of November 29, natural gas prices are up 761% from the same date in 2020.

If ever there was an example of energy price hyperinflation, this is surely it.

As I have discussed previously, the energy crisis in the UK especially is a crisis of change.

Far from Britain’s energy woes being the fault of Russia—Russia is one factor but no more than that—they are instead largely the result of change.

In the UK, in energy, as in the rest of the world and with the rest of the world’s goods and services, the 2020 lockdowns scrambled everything, including the relative costs of different goods. What the UK is experiencing with natural gas prices, energy prices more broadly, and the consumer prices for electricity particularly, is the consequence of rupturing all the world’s supply chains and distribution pathways simultaneously.

The severity and extent of supply chain ruptures and dislocations, along with the price volatility and energy price inflation that have occurred since 2020, is putting the British people through an economic meatgrinder. Outside of the highest economic strata, it is difficult if not impossible to take change of that magnitude in stride.

It is a challenge that is exacerbated by what some policy wonks in Britain label a “poverty premium”, where the lowest economic strata incur additional costs because they are unable to utilize the same opportunities higher economic strata are to control and minimize their costs

It comes amid mounting evidence that the poorest are having to pay more for essential services than wealthier households. Nearly 7 million of Britain’s poorest people are paying extra for these basic goods and services. This “poverty premium”, including areas such as the price of credit, prepayment meters and shopping in smaller amounts, could be costing such families about £480 a year, according to a study by the Centre for Social Justice (CSJ) thinktank.

It found that a third of low-income households pay more for their electricity because they use prepayment meters or pay upon receipt of a bill, compared with 20% of all households. They are twice as likely as the average family to shop in pricier small supermarkets. About 29% of those paying at least one poverty premium say they are skipping meals to afford fuel.

Ultimately, the cautionary tale to be told here is an old one in economics: price caps and subsidies are extremely destructive of markets, and invariably end up making the situations they are meant to prevent. In the case of Britain’s energy price guarantee, the price cap and associated subsidies are being steadily torn apart by the continued volitility and inflation on display in UK natural gas prices.