The UK energy crisis could impact households more than the crash of 2008

MMore than half of UK households risk being pushed into energy poverty this winter by soaring bills that threaten suppliers with mounting debts that simply cannot be repaid.

The crisis could have a greater impact on households than the 2008 financial crisis, according to consultancy Baringa Partners. The dire warning comes as bills are expected to rise by around 80% from October, just as the onset of colder weather boosts energy demand.

Winter energy bills are expected to be more than triple what they were a year ago. It will further stretch the budgets of consumers hit by a wider cost-of-living crisis that is fueling fears of a recession and prompting the government to offer more aid.

“The impact on society will be greater than the crash of 2008 in terms of impact on households,” said James Cooper, partner at Baringa. “We are now entering territory where a majority of households are in debt or in a very fragile financial situation.”

Average annual energy bills are expected to top £3,500 ($4,140) from October 1, when a new price cap comes into effect. That’s more than 11% of a household’s median disposable income, according to the Office of National Statistics.

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Energy costs could potentially drain up to 17% of household income next year if the government does not give more help, based on price cap estimates from Cornwall Insight Ltd.

Customer debt is already on the rise. In the summer, people generally pay off the debt accumulated during the winter, when they use more energy. But debts actually rose this summer as energy prices hit record highs. The situation could worsen as bills climb during the colder months.

The Do not pay in the UK attracted more than 110,000 signatures of people swearing not to pay their energy bills in protest. Even those who follow through on the threat are only a small fraction of those who cannot afford to pay, especially if the winter is harsh.

Tackling the crisis is a major challenge for the next prime minister, with little chance of new policy until Liz Truss or Rishi Sunak take office. The energy industry has urged the government to provide more help, beyond the promised £400 support for each home.

“The big concern we have at the moment is the inability of customers to afford bill increases,” said Dan Alchin, regulatory director at Lobby Energy UK. “There is an urgent need for the government to act on this.”

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Helping households by freezing the price cap at the current level for two years would require around £100bn, according to Keith Anderson, chief executive of Scottish Power Ltd., one of the UK’s largest residential suppliers. The British Gas unit of Centrica Plc will offer subsidies to certain customers to offset their energy debt.

Customers who don’t pay can be put on a refund counter or even cut off – a time-consuming process as suppliers are required to go to great lengths to help people pay what they owe. Some businesses might simply not be able to meet the level of bad debts, leading them to close their doors.

This risk will increase as the price cap rises further next year. There is a provision in the way regulator Ofgem calculates the cap to support suppliers facing bad debt, which could lead to a higher cap and therefore potentially more household debt down the line.

“There is a risk that people can’t or won’t pay and that number could grow quite quickly,” said John Musk, an analyst at RBC Europe Ltd. “It could have a cascading effect on smaller, less well-capitalized suppliers and they could start going bankrupt.”

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